After much angst I have solved the problem. I noticed today that I could not upload from the server either, but that my admin account could. Hmmm what's different? Well my admin was folder 1, my account folder 3, so what was dfferent about folder 1 and folder 3?
Folder 1 - Chmod = 777
Folder 3 - Chmod = 755
Ahhhhhh there is a difference, now we are getting somewhere...
I set folder 3 to 777 and BAM now uploads from the server work, as well as the Flash uploader.
I suspect that if the flash uploader isn't working for some member that the reason is because their user folder on the server is not set to 777.