It appears that your website user doesn't have permissions to the default windows temp directory. When files are first uploaded, they go to this temp directory, then they are resized/moved to the folder in your site.
Check out this php.ini setting:
ini.core.php#ini.upload-tmp-dir
Overriding that setting to somewhere within your web folder (the full intetpub path you have above) should fix the problem.
If you are running apache for the webserver, here is some info on how to override a value using an .htaccess file:
configuration.changes.php
In any case, it sounds like you might have to contact your host to help resolve this if the above doesn't work or you don't have permissions to change it.
