BrowserUk:
Yep, I mentioned it to him precisely because he may be inheriting some permissions he doesn't know about. I've been bitten by some odd Windows permissions in locked-down corporate environments, and nothing in the OP led me to believe that he was aware of those issues.
...roboticus
Update: I think it may be possible to get that behaviour from the Windows permissions, but I'm by no means knowledgeable enough about them to state it with any certainty.
Update: I've been reading the Icacls stuff posted, and it appears that if a directory had the AD privilege, but not the WD privilege, then they would be able to create a directory but not a file in that directory.