Local-with-filesystem SWF not permitted use sockets

I am new to Actionscript 3. I’m a systems level/back-end programmer. My main responsibility is the Java/C++ code on the server. But my server must talk to a Flash client. To test I am trying to open sockets to my server code. Typically I test this stuff all on localhost on my Mac. I get the following error when I try to instantiate a socket:
Local-with-filesystem SWF files are not permitted to use sockets

I don’t get this error when I run my client inside Flash CS3, but when I have Flash publish an html file it gives that error. The funny thing is what I am trying to test right now is delivery of the policy file over port 843! Why doesn’t it wait until it sees if it can retrieve the policy file before aborting my program? I am serving the policy file correctly (since the code works correctly when run in the browser).

Assuming this can’t be corrected, what problems will I run into if I move the socket servers (policy and my other socket server) to another machine? After 25 years as a system programmer in C/C++ and assembly I am blown away that Flash has brought me to my knees!!!