This sounds like a similar issue I am running into. When I build out my web ap in Web Dev 2005, I can see the the web app working fine, as the ASP.NET Development Server pops up and the the program shows up on the site with a port value. My problem is that when I attempt to hit it directly as if from the internet, I get a generic error message that mentions about the web.config file, I recently made a change on the site properties to change from ASP 1.1 to 2.0 now it gives a message "Server Application Unavailable" I follow the instructions according to info on the page and it talks about error 500 in the log file.
I looked in my IIS and I could not find a reference to "application pool". I have multiple sites running on this server (win2k, IE6SP1, assuming IIS5, SQL Express).
This is driving me nuts as I have web pages in the same folder that are not part of the ASP.NET (C#) application and I can view them fine from the browser, but the only way I can see my web app is through the ASP.NET Development Server program using the port addressing it specifies.