Are you accessing the site via "https"? I would suggest trying to get it to work without ssl just using "http". If it can't find the directory, it sounds more like a basic problem with the http.conf setup. Have you reviewed the deployment recipe for Apache? http://web2py.com/books/default/chapter/29/13
Are you deploying on your Windows machine? If you are just developing, I suggest just using the Rocket server that comes in the Web2py Windows package or maybe Wamp. I have found web serving on Windows to be quite unpleasant.
