IIS error application error?

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I have server 2008 with my IIS root web directory on a partitioned
drive.

Each time I set up a virtual site, whether it's a subdirectory of the web
directory or not, with an application pool, and playing around with the
permissions I still keep getting the following error:

<authentication mode="Windows"/> (in VS2008)
This error can be caused by a virtual directory not being configured as an
application in IIS.

So frustrating. Suggestions appreciated always.

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Thanks for the reply.

I just right clicked in IIS on the root web to add a virtual directory which
I think is what you asked.

I searched the properties of vs2008 but couldn't find anything that seemed
relevant other than playing around with the web.config file.