To make a long story short, I managed to do the following in order to get uploads, add images to nivo slider, and the Really Simple Captcha plug in to work in a Windows IIS environment:
1. Added following line to wp-config.php:
define(‘UPLOADS’, ‘wp-content/uploads’);
2. Gave Full Control permissions to IIS_IUSRS to the wp-content/uploads folder and any subfolders.
While this works and all, my concern is that a hacker can perform malicious stuff in this uploads section so I was wondering if any upload performances can be done by perhaps the ftp user instead at least?