Once you've click "Convert to Application" simply close IIS and click continue below to continue with your installation.
Configuring IIS on Windows Server 2003
Once you've clicked "Create" and converted the InstantKB.NET folder to a IIS web application simply click "Apply" to save any changes and exit IIS. These are the only changes required to IIS on Windows Server 2003.
Configuring IIS on Windows XP
Click Start, click Run and type "inetmgr" without the quotes, click OK. This will launch the IIS management console.
Locate the "IntsantKB2011" folder and right click to show the context menu. Click "Properties" as shown below...
Clicking properties will present the dialog window shown below. Click the "Create" button as shown.