gday -- are you using plesk or cpanel?
I have had both in the past and am currently on a dedicated 2008 server (the previous was a virtual 2003)
IMHO it is much easier (and saves a ton of resources) if you drop the plesk/c panel and work the server as a regular server. If you get into the server from any place other than your control panel you are in big trouble. Not to mention it is kind of redundant to get a Microsoft server than have to install wamp(apache) or tomcat to administer it.
If you are going that route simply get a Linux server and you probably won't run into that many issues since the folks here at WordPress are big into the opensource stuff anyway.
With that said, using virtual directories is the only way to go with Windows based servers. For starters all that chmod stuff doesn't apply to Windows, secondly as I said you are actually applying those configurations onto an apache or tomcat server running on the Windows platform eating up resources. Not to reiterate but if you go Microsoft don't get the control panel.
Next, with the Windows set-up so YOU administer it, NOT apache or tomcat or whatever, you simply go to the IIS console, click on the "site" folder and create a new "Web Site". If you are not familiar with using Windows then, you probably are lost by now in which case, I again would go the Linux route with the Plesk/C-Panel.
With the Microsoft server you can then place you're Mu folder OUTSIDE your inetpub folder thusly keeping it as locked down as it should be. The reason being is that once you install Mu into the inetpub folder and allow the world privileges all the way down the "food" change, you are leaving the rest of your Windows inetpub folder vulnerable.
Whelp to keep this to get to windy, there are ways of moving inetpub to another partition/drive (which again is always a good idea for security reasons) via batch files that make life easier, then you'll need to install PHP, MySQL, Sun JAVA, and a Java Bridge to allow your php to execute the java (where as the two script languages (php and java) don't like to play together very well on a Windows server)....
Email me if you want more gory details so I don't kill this thread with details about Windows Servers... (I. Myself prefer Windows over the OpenSource servers)