I keep running into this same problem, and I never find a solution other than just creating a separate website. I always get errors when creating an asp.net virtual directory inside of another asp.net site. I have found many blogs with work around to remove things like http modules and I belive another...

I have 3.5 installed on the server and I added the compilers section to my web.config as shown above, but i still get the error: The type 'System.Data.Objects.DataClasses.EntityObject' is defined in an assembly that is not referenced. You must add a reference to assembly 'System.Data.Entity...