I'm going to reply to my own message. I figured out how to get around this seeming file upload bug in WordPress.
In WordPress Admin, under Options>Miscellaneous--here is where you set the absolute path and absolute url to your image upload folder.
After you have set your permissions on the image folder to CHMOD 777, there is a little trick I had to do for WordPress to accept my absolute path.
Normally you would write the path with \ backslashes, not forward slashes /, those are for the url. Everytime I would use the backslash \ for the absolute path, WordPress would take them out, making the path look like this:
Of course there was no folder with that name, so the upload function could not detect the right folder. Then I noticed on the example WordPress gives you:
You see all backslashes except the last one...Wierd I thought. Well after copy and pasting it in that way, I noticed that WordPress removed all the backslashes and kept the one forward slash in the path. So I figured it was worth a try--I used all forward slashes for the absolute path AND absolute url--It worked!!!
This is what my absolute path looks like:
This is what my url path looks like:
Just in case anyone else out there runs into the same problem, this is what I did.
Christ, it's nice when something finally works.