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These are the steps he needs to do.
1. Determine why categories do not create --ie is it a permissions thing or a path problem since he says safe mode is off.
2. clear the data directory of everything except the 1 2 and 500 directories. make sure it is 777 permissions.
3. Go to admin edit categories and delete the categories you created
4. Recreate your categories
See that they are actually created.
You should then be able to upload. Just an fyi the only reasons I know why a data directory would not be created is as I posted safe mode is on or your path/permissions are incorrect.
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