Ipstenu,
Hello. I was refreshing this forum all morning until I saw your post. I am excited to try and finally solve this problem and get wordpress upgraded today. :)
To answer your questions, I have 2.3.3 on my test site and it's working alright, but I need to upgrade it as we know to 2.8.6
I have been doing sequential upgrades as advised by the folks in IRC chat #wordpress
It was advised that I go from where I started, 2.0.4 ->2.2.3 -> 2.3.3 -> 2.5 - > 2.6.5 - > 2.7 - > 2.8.6
The hangup is on 2.5 where I get redirect loops, so I really wonder if I will actually have more success going directly to 2.8.6 without the redirect loops?
I hope this gives us more clarity now :) I look forward to your response once again.