Yes, it works fine on your demo site.  It works fine on my Windows Server 2003 IIS6 32bit box.

 

When the site is hosted on my Windows 7 IIS7 64bit box or on a Windows 2008 Server IIS7 64bit box it will upload files less than 1 mb in size, but not files larger than a couple of megabytes.

 

I just copied the site to the Windows 2008 Server box this morning and got the exact same result as the Windows 7 box.   Do you have users or do you guys have it running on a 64bit IIS 7 machine?