I encountered this problem when I had to develop new parts of my website in ASP.NET 4.0
My development machine runs on WindowsXP, in which its IIS version cannot support multiple application pools like in IIS6.
By "default", if I create a sub-virtual directory of different asp.net version, I will get "Application unavailable error". I thought there's no fix except to upgrade to Win2003.
But I found a "solution". Here goes
In the main virtual directory (ASP.NET 2.0) I set the application protection to Medium(pooled)
In the sub-virtual directory (ASP.NET 4.0) I set the application protection to High(Isolated)
Now both works !