I always get the error message Not a TDS-compliant root directory when I try to add a root to MiKTex. And it always takes me forever to figure out how to fix it. What works for me is to put all my stuff in the folder C:\local\tex\latex\ and add C:\local as a root directory.
edit: newer, works on Win7 64bit
- Put everything here: C:\Users\<username>\texmf\tex\latex\local\
- add folder C:\Users\<username>\texmf to miktex watch list