Under site managment, what is the setting for "links relative to"
you can select either root or document. I use document. Maybe that will help
I would recommend leaving the template in the template folder. I keep all my working files (images being edited, master images, and any other media used to to build the site.) in the template folder. Since I am usually working on 3 or 4 sites, this keeps all the material for a particular site easy to find.