Hi Mark,
That error is expected to be logged every time the application starts in medium trust at least under .NET 3.5. In .NET 3.5 VirtualPathProviders do not work in medium trust but they do work in .NET 4 medium trust. The custom VirtualPathProvider that we use allows us to keep the theme.skin file in the skin folder instead of under App_Themes, but it does not work in medium trust under .NET 3.5 that is why you end up having to copy the theme.skin file from your skin into the App_Themes/default folder.
So it is a big reason to use .NET 4 when possible, especially when hosted under medium trust. Though I'm not sure if there are differences in medium trust under Rackspace cloud hosting, but in regular .NET 4 medium trust hosting it works.
Hope it helps,
Joe