What exactly are the errors you are getting? did you configure this subfolder as an application? I dont think it needs to be if it is running PHP, although I haven't done this in years so I could be wrong...
if it is, the problem is likely due to the subfolder application inheriting from the root site web.config, which is an issue with asp.net itself.
I dealt with this in the past, and this article might be helpful to you: http://www.aspdotnetfaq.com/Faq/how-to-disable-web-config-inheritance-for-child-applications-in-subfolders-in-asp-net.aspx
basically you need to remove all references from the root site in the subfolder applications web.config file.
hope this was helpful!