Hi Ron Van Volkenburgh,
We are aware of this issue in Sitefinity > Files and it has already been fixed for the upcoming SP2 that should be out by the end of the month.
In fact, the files are uploaded fine in the File Manager. You can try setting full permissions to the WebSites folder, using the "Replace permissions entrie on all child objects..."
option; this helps to get rid of the Access denied
message in most cases. We are sorry for the inconvenience this has caused.
Please note that when uploading files using the Sitefinity File Manager (Files tab), the images are always stored in the file system, while using the Insert an image
or Insert a document
dialogs in the rich text editor (Generic Content instances at the Pages, Templates or Modules tab), you can choose whether to store the files in the database or the file system.
the Telerik team