Could you not setup WAMP and see if you have the same issue? That would rule out IIS.
Ok, this may help
Fixing File Upload Size Limit in IIS 7 | cyprich.com
You will have Moodle as an application i think you need to create a file called web.config (if it doesn't already exist) and add the text shown on the blog above
That pot of straws has now definately run out ;)
Yes, I did all that back on page 1 - but thanks for the pot of straws anyway!!
Come on all you other clever..people - someone must know of some setting I have missed SOMEWHERE :(