Sorry to post again on this. I tried everything suggested including:
777 on wp-content, 777 on uploads, 777 on gravity_forms.
I checked with my host that safe-mode was definitely off.
I kept getting the error and the only fix was to use the method of altering forms_model.php in this post:
http://forum.gravityhelp.com/topic/resolving-failed-upload-folder-could-not-be-created by Idealien.
I am using Gravity Forms 1.4.3.1
Wordpress 3.0.1
Was hoping there might be a fix to this.