IIS 7 Fancy URL Rewrite Issues

We just set up a new instance of WordPress on our site. Everything works fine, except if you try to click on a blog with fancy URL’s on, it doesn’t work.

Our web.config file contents is as follows:

<?xml version="1.0" encoding="utf-8" ?>
<configuration>
	<system.webServer>
		<rewrite>
			<rules>
				<rule name="Main Rule" stopProcessing="true">
					<match url=".*" />
					<conditions logicalGrouping="MatchAll">
						<add input="{REQUEST_FILENAME}" matchType="IsFile" negate="true" />
						<add input="{REQUEST_FILENAME}" matchType="IsDirectory" negate="true" />
					</conditions>
					<action type="Rewrite" url="index.php" />
				</rule>
			</rules>
		</rewrite>
	</system.webServer>
</configuration>

That code came directly from WordPress when enabling the fancy URL’s.

The error code we are getting is: 0x80070002

The requested URL is:
http://realtytech.com/blog/2011/08/24/custom-pages-agent123-upgrade/

But I guess the server is trying to literally load that directory:

c:\**\**\blog\20118\24\custom-pages-agent123-upgrade\
[Server info removed for security reasons]

We have searched all of the available resources for any information we could find, but we are stumped.

Looking at the phpinfo, it shows the following information:
_SERVER["IIS_UrlRewriteModule"] 7.1.0871.0
Which I assume means that PHP sees the Rewrite Module.

I can also see that the server is running in FastCGI mode:
Server API : CGI/FastCGI

Does anyone have any suggestions of what we can do to get this working?