Not sure if this is your problem or not, but I did find a bug in IIS 4.0 or 5.0 awhile ago where the root web that is displaying isn't actually the path. You have to enter it twice. I was going nuts trying to find out why the same thing as you mention was happening and then I checked google and found the answer. If this is the problem, all you have to do is change the root directory for your web by clicking Browse and you'll notice that the Browse does not take you to where the root is supposed to be. Find your root web folder and that should be all you have to do.
Just in case that was your problem, if not, disregard.