We are uploading about 500 images at any given time

max_file_uploads = 600
memory_limit = 200M ( most images are 12-15KB )
post_max_size = 200M

How come we still getting that warning?

EDIT: Each one of these variables are occur the php.ini file and confirmed by checking using phpinfo()

The PHP script will not attempt performing until all of the files happen to be submitted. This means that you can't alter the max_file_uploads directive from inside PHP, e.g. with ini_set(): you must do it within the php.ini file. Otherwise, whenever you alter the setting the limit was already hit.

add max_file_uploads=500 to php.ini