OK.. I think I figured it out.
The effective permissions on both the upload folder and the \temp folder must have the IIS_IUSRS write/modify permission. Even though I had Everyone with the same effective permissions it didn’t want to work. After adding the IIS_IUSRS write/modify permission to the above folders worked as advertised. This is an issue with IIS 7 and not a word press issue… Thanks for the help.