Yes its much clearer now what the problem is since you posted the error.
I forgot about this, we loop through existing files to make sure no virtual urls are created that would mask physical files. I hadn't thought about how common it may be for there to be folders in the root that we don't have read permission on.
I'm fixing this right now in my local copy by catching UnAuthorizedAccessException and SecurityException in places where this could happen as indicated by the error message.
It will be fixed in svn trunk by tonight and will be fixed in the next release.