I was able to deduce the problem with the EGroupware embedded Gallery2 Windows XP Publisher upload issue.

The issue was that the embedded Gallery2 will not properly handle logins if some performance settings are enabled, namely page caching. I have turned off the page caching and the Windows XP Publisher is now able to publish images to the gallery properly. There is a change that needs to occur in the Windows registry to use the new URL. I will be posting information in the knowledge base related to this issue.