Near as I can figure my thumbnail problem is being cased by incorrect permissions being set on my files. So the images upload fine and then are unable to create thumbnails because they cannot be read. In order to create the thumbnails I have to change all of the permissions on the files for the CREATOR OWNER to full control.
I’m running on IIS with Windows 7 x64 RC, not that that is a big reason for it. It just looks like that whoever is creating the images is also setting the permissions strangely… perhaps not even with proper read permissions.