How To Get A Custom WebDAV To Run in Windows Server 2008 R2 with IIS 7.0

I am trying to create a WebDAV application using the below link as my starting point.

http://sourceforge.net/projects/webdav/

I got it working just fine in IIS6 but can't seem to get it to work in IIS7.  Does anybody know if there are any unique configuration settings that need to be made to make it work in IIS7?

The problem appears to be with the authentication.  When I attempt to connect via Network Folder using http I get a 401 challenge dialog and it won't accept any credentials.

The website is running under a yy service account and has no problem accessing the database, but once it attempts to access the file using http it throws the 401 error.

Below is the web.config that is attaching the http handler to process all the verbs

    <system.webServer>
        <modules>
            <add name="FileWebDAVModule" type="Sphorium.WebDAV.Examples.FileServer.FileWebDAVModule, Sphorium.WebDAV.Examples.FileServer" />
        </modules>
        <handlers>
            <clear/>
            <add name=".NET Runtime" path="*" verb="*" modules="IsapiModule" scriptProcessor="C:\Windows\Microsoft.NET\Framework64\v4.0.30319\aspnet_isapi.dll" resourceType="Unspecified" requireAccess="None" preCondition="classicMode,runtimeVersionv4.0,bitness64" />
        </handlers>
    </system.webServer>