I had something like this happen to me after a recent update, i had deleted out all my wtf folders and config files and then started my group with IS but none of my settings ever took. It seems like it cannot virtualize the file initially if the original root file doesn't already exist.

To fix it, all I had to do was start the plain old WoW client by itself and log in to a character, then exit the game normally. The next time I used IS, all the virtual files worked as they should have.

Also, you may want to look at the virtual files themselves to verify they are being created and have the normal config contents.