Path to blogs.dir

When I installed MU I placed the folder on in the root directory of my d:\wordpressmu (d drive) and then using IIS 7 created a virtual directory to my main web site which is also in the root directory of my d drive
d:\my web site

Now when people are uploding avatars they are winding up in the root directory of d:\my web site

Also, Whe I attempt to upload files from the computer they are in fact going into d:\wordpressmu\wp-content\blogs.dir\2009\10 directory but they are not showing up in the image gallery

One more thing, when I added MU as a virual directory, I named the direcotry "blog"

When I browse to the to the blog every thing is fine http://my website/blog
however, when I click on a post within the blog, the url changes to http://my web site/blog/blog/2009/10/name of post/

Where is this second /blog/ coming from and why is the url to all my images in the image gallery showing up as being in this is a real link and the images are in not there but in fact in
C:\Users\Administrator\AppData\Local\Microsoft\Windows\Temporary Internet Files\WebTempDir\iaea_iran3893_300x2001-75x75.jpg on the server.. this just started happening in October all the files from September are fine.

Now if I "link" the files from a url say http://mywebsite/images/image.jpg they show up fine?

I am attempting to go "live" by the end of the week and have folks posting and testing right now

Please Help!!!