Create a Web Application in a SharePoint Web Site

Hi, 
I  got the problem while programming ASP.NET with sharepoint services following
the 
Document Name: Microsoft Windows Sharepoint Services V3(Beta) SDK
Topic: How to: Create a Web Application in a SharePoint Web Site 
Sub Topic: To create a tool for reporting a user's SharePoint Web sites and
security groups

While I built sharepoint program in asp.net 2.0 as you told in this topic,
following error has been occurred. There is already installed Sharepoint and VS
Studio 2005 in my PC.

It is an error to use a section registered as
allowDefinition='MachineToApplication' beyond application level. This error can
be caused by a virtual directory not being configured as an application in IIS.
(C:\Program Files\Common Files\Microsoft Shared\Web Server
Extensions\12\template\layouts\sps_protest\web.config line 28)
I had simply build the application in the location: C:\Program Files\Common
Files\Microsoft Shared\Web Server Extensions\12\template\layouts\sps_protest\.
Should i compulsory need to choose location as
http://Server_Name/_layouts/Web_Application_Name? 

Also, I had built same application by selection this server location. 
But it displays dialog box  of "Unable to start debugging on the server.
..."

What I have to do to make it?