Its got to do with the way PHP handles folder / file permissions. It doesn't like to make a directory 777 as it would be too insecure, but for uploading images, files etc its perfect.
You will need to trick it and create the directory, then change the CHMOD to 777. Heres how:
<form method="post" action="directory_make_upate.php">
Create Directory:<br>
<input type="text" name="file" size=15>
<input type="submit" value="Create">
</form>
<?
mkdir($file,0777);
chmod ($file,0777);
?>
ok?
Yari