Figured it out...
I figured it out.
I didn't quite get what they meant by "build outside source directory"... I thought they meant I had to build it from $LFS/(name of package) but couldn't manage to do that because of the permissions that the lfs user lacked... So I originally built it inside the $LFS/sources/gcc-4.1.2 folder that was created when I un-tar'd the package.
NOW I understand that you have
$LFS/sources - where the source tarballs are kept
$LFS/sources/package-name - where the tarball gets untar'd to
$LFS/sources/package-build - where you go when you actually issue the configure, make and make install commands
Once I figured that out, make bootstrap worked just fine.
I think that the main thing that messed me up was that in the book they walk you through almost everything, right down to the mkdir and cd commands, but they omitted the tar command for untaring the package, then changing into that folder. So I was sitting at $LFS/sources trying to run the first step in chapter 5.4.1 "mkdir -v ../gcc-build" and getting stuck on why it wouldn't work.
You end chapter 4 with:
and start chapter 5 with:
mkdir -v ../binutils-build
Really, there should be three more commands at the beginning of chapter 5:
tar -jxvf binutils-2.17.tar.bz2
THEN what's written there.
Same for subsequent sections, the tar and cd command should be included so that people who are following step-by-step don't get lost.