Adding the servers to the trusted sites list did not make any difference, but as noted before these are not on a local drive, they are actually on a server on the local network. I have tried both kmls, and kmz's as well as using the IP address, just the server name, and the fully qualified domain name, none of which worked.
It looks like it is hitting utility.arcgis.com. Someone had mentioned some sort of parser on ESRI's side without elaborating. Is it possible that they have a parser on ESRI's site trying to read from the kml's url which is not accessible from the internet because it is on the military network? If so, that would be really crummy for all military organizations and anyone using an intranet to serve data in house.