I've never actually used this feature of WordPress, I guess I'm one of those people you doesn't mind the file in the root of my site folder.
I'm just about to release a new version of Members Only (0.6.5) this weekend before I embark on per-page and per-category protection, so I'll get this fix into 0.6.5.
I think I'll check whether
get_bloginfo('url') == get_bloginfo('wpurl') and then make the alterations in the code based on that logic, as I'm a little concerned that the fix above might break things for other users.
I'll create a new test bed with WordPress installed in a different directory to check this going forward.