How to set permissions on a local virtual directory mapped to an UNC directory

Question

I'm trying to set up test environment that includes a VM (running Win7-x86) hosted on Win7-x64.

I want to be able to use VS2010 in the VM, to work on a web application project on the host machine.

So I've set up a virtual directory on the VM, and set its physical path as an UNC path. I've set the physical path credential to be an administrator on the host machine, and I've set

<system.web>
    <identity impersonate="true" />

... in web.config, as discussed here, and the KB article it references.

However, no luck, i still keep getting this as the error message when I attempt to run the site from the VM:

HTTP Error 500.19 - Internal Server Error
The requested page cannot be accessed because the related configuration data for the page is invalid.

I'd really appreciate some ideas, TIA.