Setup: Windows Server 2008 + IIS 7 + MySQL 5.1 + PHP 5.2

*SOLUTION FOUND*

To make the ffmpeg thumbnailer function correctly you need to do a few things and make sure they are done properly;
1. ffmpeg.exe needs to be located at C:\ffmpeg\ffmpeg.exe <- copy this directory and paste it in the Video Converter Path setting
2. ffmpeg.exe is a command script, if you are on Windows like I am then go to your server C:\Windows\cmd.exe <- open Security and set permissions for Internet Guest Account (usually: computername_IUSR or just use the whole group with IUSRS) to READ AND EXECUTE
3. Go to Site Config > File System > make sure the Temporary Directory gives * IIS_IUSRS READ AND EXECUTE PERMISSIONS * <- VERY IMPORTANT
4. If you still receive errors but the movie uploads and is playable you have permission problems, took me hours to figure this out.

Enjoy.

Another drupal issue solved through ridiculous permissions issues as related to this post on the drupal boards: http://drupal.org/node/690950#comment-2675452