The Web Server Could Not Find the Requested Resource

I have a .NET 3.5 Web application on VS 2008 SP1 running on Vista Ultimate 32 SP1. I created an Application under the Default Web Site. So the url to the app is "http://localhost/mysite". The application folder is pointing to the solution folder and it is outside the iisroot folder. Anonymous and Integrated Auth (Windows) is enabled in IIS7 for this web application "mysite".

I gave full permissions to "Network Service" user to the application folder (which is outside of iisroot).

When I hit F5 to star debugging, I get the "Unable to start debugging on the web server. The web server could not find the requested resource." error.

I fired up TcpView (Sysinternals) to see what app is actually running and keeping an handle on that port and I found out there is no app listening on that port. This is really weird… Any creative ideas?

I can hit the URL "http://localhost/mysite" without a problem. That web application is set up to be the start up project and Default.aspx is the start up page.

There is an .asmx service in the prject as well. The Default.aspx is making use of that asmx service. The AutoCompleteExtender (From the AJAX Control Toolkit) is using this asmx service.

Everything works by the way. The issue is the debugging… I suspect the asmx service is causing this but i don't know. This is driving me nuts…