Is it bad practice to use a Visual Studio Project folder as a virtual directory in IIS when doing development?
Instead, should I copy the files to a separate folder once the application is compiled?
Provided you're not using this same environment to push live changes, it's fine for a development setup. Of course if you're on a live website, it's not a good idea at all. I think it's actually a pretty good idea for dev testing, as it saves you the step of having to move the files over to test.