I figured out my problem. The Lotus documentaion only tells you how to enable WEBDAV from the server and designer perspective. It does not tell you how to use it. If you look in the Domino Designer 6 IBM Redbook
http://publib-b.boulder.ibm.com/redbooks.nsf/RedbookAbstracts/sg246854.html?Open it explains how you actually add a Network place in Windows. When I put the URL in correctly it worked in both windows and Dreamweaver. The URL needs to be formatted as follows.
http://mydomain.com/webdavtest.nsf$files I was missing the $files at the end of the URL. It would be nice if Lotus would add this to their documentation, it would have save me hours of looking elswhere.