I think that the problem is the configuration inheritance, which is a feature of Asp.Net. Perhaps the config setting describing the web service location is overridden by the parent web.config file. You can also check if you have app.config or other config file in the web service directory, and modify the path (if it is changed for some reason).
As for the inheritance, please check the following blog post - I think it will help you - http://www.kowitz.net/archive/2007/05/16/stopping-asp.net-web.config-inheritance.aspx
the Telerik team