There are a couple of possibilities in this thread that you should look into. People with the same issue of relative paths work in subdirectory but not in root, and they are all using iis7 with php applications.
http://www.webmasterworld.com/php/3685216.htm1. I'm not sure if this only applies to ASP/SSI, but IIS6 (not sure about 7) does have a "parent paths" option. If you select your websites and go to the Scripts Configuration menu, under the options tab "Enable Parent paths" is an option.
2. I ran into this problem, too; giving the anonymous IIS user permissions to the parent directory fixed it.