The report server is not responding. Verify that the report server is running and can be accessed from this computer

I am trying to run SSRS 2005 on a windows 2008 server.

I have configured SSRS using the tool and get all green check boxes.

when I go to http://localhost/reports I get the error:
The report server is not responding. Verify that the report server is running and can be accessed from this computer

In googling soplutions on the web everything seems to point to NETWORK SERVICE not having the correct permissions to the C:\Program Files\Microsoft SQL Server\MSSQL.2\Reporting Services\ReportManager directory.  I have given NETWORK SERVICE and IUSR read / execute access but still get the same error.

I have also tried the stop reporting services, restart IIS and then start reporting services, this too doesn't do anything for me.

I have downloaded and run process monitor to look at the filesystem and it basically is showing the following:

Date & Time:      3/26/2010 11:07:56 AM
Event Class:      File System
Operation:      CreateFile
Result:      PATH NOT FOUND
Path:      C:\Program Files\Microsoft SQL Server\MSSQL.2\Reporting Services\ReportManager\Pages\Folder.aspx\web.config
TID:      1424
Duration:      0.0000458
Desired Access:      Generic Read
Disposition:      Open
Options:      Synchronous IO Non-Alert, Non-Directory File
Attributes:      N
ShareMode:      Read
AllocationSize:      n/a

Look at the path ... it looks like it is trying to find web.config in the wrong location ...

If I look at IIS the virtual directories apper to be correct:
Reports -> C:\Program Files\Microsoft SQL Server\MSSQL.2\Reporting Services\ReportManager
ReportServer -> C:\Program Files\Microsoft SQL Server\MSSQL.2\Reporting Services\ReportServer


Any thoughts?