IIS7 and Permalinks catch 22

WordPress is able to write to the web.config file with no problem and is adding the code shown here: http://codex.wordpress.org/Using_Permalinks#Permalinks_without_mod_rewrite
For my permalinks i would just like the postname.

If I use /index.php/%postname%/ I can get to my pages, but get a 404 on post permalinks.

When I remove index.php from the permalink structure filed (and use only /%postname%/) the URL will change when I click on page and post links but when the page or post reloads I am seeing the index page content for each one.