IMPORTANT!
I had to change the permissions on my temporary directory to include some read/write permissions for the IIS users group.
I did use the IIS WordPress Web App Installer through the web platform installer.
It seems to me that when running on Windows, WP should copy the file into place and delete the file in the temporary directory, or WP could update the permissions after the upload is complete
Alternatively this could be looked at as a bug with the installer where it doesn’t either set the permissions on the temporary directory, or it doesn’t change the php uploads directory to be something in the uploads dir itself.
Anyone who installs WP for IIS on 2008 server will hit this problem.