I will try to explain the changes in between two latest Windows Azure SDK (by using same sample app) as below so please have a look at each case and the path shown in the error message:
In previous SDK the virtual directory source was set to default at the root of the project however now in latest SDK the virtual directory source is set at project output directory which you can see in Case #1 below.
Case 1: (Failed)
<VirtualApplication name="MyWeb" physicalDirectory="MvcWebRole1">
Error: Cannot find the physical directory
'C:UsersavkashcDocumentsVisual Studio 2012ProjectsWindowsAzure2012WindowsAzure2012inReleaseMvcWebRole1' for virtual path Web/MyWeb/.
Case 2: (Failed)
<VirtualApplication name="MyWeb" physicalDirectory="..MvcWebRole1">
Error: Cannot find the physical directory 'C:UsersavkashcDocumentsVisual Studio 2012ProjectsWindowsAzure2012WindowsAzure2012inMvcWebRole1' for virtual path Web/MyWeb/.
Case 3: (Failed)
<VirtualApplication name="MyWeb" physicalDirectory="....MvcWebRole1">
Error: Cannot find the physical directory 'C:UsersavkashcDocumentsVisual Studio 2012ProjectsWindowsAzure2012WindowsAzure2012MvcWebRole1' for virtual path Web/MyWeb/.
Case 4: (Success)
<VirtualApplication name="MyWeb"
physicalDirectory="......MvcWebRole1">
Because above case #4 folder setting does match with my actual MvcWebRole1 folder structure (seen below) at thats why "......" setting does work in my "PhysicalDirectory" setting.
You would need to walk through your folder structure from release* as your source and then back track all the way where ever it exist and then assemble the full path.
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