I'm sorry to raise this again, from the forum I can tell it's been done to death, but I honestly can't find a solution to the issue.
As previously stated, it looks like the problem is one of folder ownership and permissions. WordPress seems to be creating a folder under blogs.dir owned by "apache" and then is unable to write into it. If I change the ownership of the folder manually it can then create folders under it, but again creates them with the wrong owner. I *could* fix them manually but I'd have the problem every time someone creates a new blog.
Has anyone ever come up with a real solution for this problem?
I'm also interested who you're hosting your Mu installation with if your "upload images" function works out of the box.
Thanks for the input
Owen