It's been a long time since I made this post, and I'm sorry I didn't post the solution back then. I suppose it's better late than never. Anyway, it seems that the PLupload asset does some sniffing outside of what Joomla allows. The fix to the issue is to comment out some checking in the /libraries/joomla/filesystem/path.php file:
public static function check($path)
if (strpos($path, '..') !== false)
// Don't translate
throw new Exception('JPath::check Use of relative paths not permitted', 20);
$path = self::clean($path);
//if ((JPATH_ROOT != '') && strpos($path, self::clean(JPATH_ROOT)) !== 0)
// throw new Exception('JPath::check Snooping out of bounds @ ' . $path, 20);
The lines I commented out were 175 - 178 and magically the plupload worked again. I have confirmed this issue using both XAMPP and Abyss webservers on the Windows platform. The issue doesn't seem to exist on Linux.
As a side note - If you're concerned about commenting out those lines for security reasons, you can just set the Uplaoder Runtime to HTML4 in the configuration/uploads section and things seem to work fine.