In my previous post I rambled about a bug in the Web Application .targets file. I found an easier solution which does not involve patching any existing files.

The solution is to add the dependency projects to the msbuild target list like so:

msbuild /t:ResolveAssemblyReferences;_CopyWebApplication

     /p:OutDir=..\Drop\bin\ /p:WebProjectOutputDir=..\Drop\

Wow. Life CAN be easy.

Update: Even more so, it is better to use ResolveReferences, which also copies any project assembly references you have in your project.

 Update 2: You actually need to add a 'bin' directory to the OutDir folder.