<p>According to <a href="http://msdn.microsoft.com/en-us/library/bb386454.aspx" rel="noreferrer">Microsoft</a> the FileUpload control is not compatible with an AJAX UpdatePanel. </p>

<p>I am aware that a PostBackTrigger can be added to the submit button of the form like this:</p>

<pre><code>&lt;Triggers&gt;
  &lt;asp:PostBackTrigger ControlID="Button1" /&gt;
&lt;/Triggers&gt;
</code></pre>

<p>The problem is that this forces the form to perform a full post-back which voids out the whole point of using the UpdatePanel in the first place. Is there a workaround to this issue that does not cause the whole page to refresh?</p>

I know of a third party component that can do that. It's called
"
swfupload
"
and is free to use and open source, and uses javascript and flash to do the magic.
here is a list of the features they offer:
(from their site)
Upload multiple files at once by ctrl/shift-selecting in dialog
Javascript callbacks on all events
Get file information before upload starts
Style upload elements with XHTML and css
Display information while files are uploading using HTML
No page reloads necessary
Works on all platforms/browsers that has Flash support.
Degrades gracefully to normal HTML upload form if Flash or javascript is
  unavailable
Control filesize before upload starts
Only display chosen filetypes in dialog
Queue uploads, remove/add files before starting upload
They also have a
demo area
where you can play around with their control. That way you can make sure it is exactly what you want.
We used it in one of our projects and it has never failed us so far, so I think this is a safe bet.
oh and here is the download page:
http://code.google.com/p/swfupload/