Hi bldninja. If I could offer you better advice I would, but really I hate to see a user not get an answer. So here I am answering without a good answer...

Have you used the search feature to search the forums for something like "unknown error occurred"? because possibly others have had your problem and found resolution. Observing that your server was capable of creating user and blog specific folders is a good sign, but still a search might help you find the key to getting this working on your server.

Best of luck with this, and please don't hesitate to follow up with more questions.