This Virtual Directory does not allow contents to be listed.

Ok so let me explain more.
This server has exchange installed on it as well. I am not sure why it does but I have been reading that this might cause some of the problems.
I have a folder that all I want to do is allow for browsing, nothing else. I do not want to use ftp due to some current problems. any other suggestions?

Hello,

make sure that the interactive user has correct rights to access that disk location (ie ntfs permissions)

if it is anonymous access, then make sure that the "IUSR_<computername>" user has read access permitted.

Cheers.

Interactive user? this is the logged in user to the shell.. if no one is logged in what will happen?
Ok..  cpfeiffer .. you have 2 levels of "security systems" in IIS.. the first is from within IIS, you configure it on the website propreties itself (the 4 check boxes.. read. execute..etc) the 2nd is the NTFS permissions on the physical web folder.. so based on the context of the logged user you will need to give that user NTFS permissions explicitly on the folder if the anonymous account (Iusr_servername) is not enabled from the website security propreties..
so in your case you have exchange, most probably domain users will login.. so create a local group on the server and addto it users and domain groups.. give that created group ntfs pemissions to list folder contents and read on that directory.. and your problem will be solved
regards

Here is what I did. I gave IUSR_SERVER01 the following permissions on the NTFS folder: Read, Read & Execute. I have also set up in IIS to allow anonymous access as well. I have set all 4 permissions as well on there: Read , Write, Directory Browsing, and Index this resource.

This is why I dont understand why it is not working. any other help.

Even when you go to the Site it ask you for a user name and password

Ok heres whats weird. I shut down all the other sites running on the server that were using port 80 and tried to access it then and had no problems getting to the site. any ideas?

There is only one IP address for the computer. It is behind a firewall so does that mean that I need to set the explicit IP to the 192.168.0.2 address?

may be a good idea to do it anyhow.  plus take extra care that all web sites have host headers configured.

also - are any of those sites needing ssl?

Cheers.

on that last point, would be best to make all 'ssl' port values blank.

If it is behind a firewall.. and you will not use host headers then you will need to assign to each site a different port and open that port on the firewall for inbound traffic..
Now if you want to use the same port 80.. then use host headears in each site as said by meverest.. this can be added in the site propreties advanced button.. now it's not all.. a host header meanse that IIS will check the client http request header to see what site he requested in order to service him the correct site.. for this for each header (which is a URL address) you need to add a host record (A record) in your external DNS domain zone so the clients will resolve the header to your IP address..
ex:
web.mydomain.com   [IP address X]
web2.mydomain.com   [IP address X]
etc..