One of the other developers at my company wrote a .NET 2.0 web site. He stores everything...solution, project, source...everything inside of "inetpub\AppName" (the IIS share). I have never seen this done before. In fact I'm kinda surprised the website loads up in a browser. Are there any disadvantages to doing this over say...storing your solution in the visual studio 2010 projects folder and then publishing the website to inetpub (security, speed, etc)? Also, Why does this work?
It works because the site would be compiled on the fly. This is bad from performance point of view (because the late compilation) and it's bad from security point of view (you're exposing your code more than necessary).
From MSDN
Because ASP.NET compiles your Web site on first user request, you can simply copy your application's source code to the production Web server. However, ASP.NET also provides precompilation options that allow you to compile your Web site before it has been deployed, or to compile it after it has been deployed but before a user requests it. Precompilation has several advantages