As mentioned before, Visual Studio 2005 normally considers all files in a folder or sub-folder to be part of the Web project. By default, the conversion wizard will create a backup of your Web project in a safe location, but it is possible for the user to overwrite the default. If you put the backup folder in the Web application's folder tree, you will get this somewhat cryptic build error:
Error 1 - It is an error to use a section registered as
allowDefinition='MachineToApplication' beyond application level
How to fix
Make sure your backup location is not in the Web application's root folder or sub-folder!