Hello,
This issue has been solved through e-mail, but I will summarize it for other visitors. Basically you can use following configuration:
1) Set both 'DemoSite' and 'DemoSite/KenticoCMS' folders to be virtual directories.
2) For 'DemoSite' folder use your own web.config only with connection string and lines that you need for your application without any Kentico CMS stuff .
3) For 'DemoSite/KenticoCMS' folder use default web.config of Kentico
CMS4) Remove all Kentico CMS stuff from 'DemoSite' folder (like bin and app_code folders) and leave only your stuff and 'KenticoCMS' sub-directory in 'DemoSite' folder.
Since there is special web.config file in each folder the web.config from sub-folder is inheriting settings from web.config from parent folder and there may appear some errors like: "the entry '...' has been already added"
The solution is to remove these entries from web.config from sub-folder.
Best Regards,
Martin Dobsicek.