Win2k3 IIS FTP Non-AD User isolation setup - error: 530 User Test\test1 cannot log in, home directory inaccessible

Win2K3 SP1 - I have been beating this issue into the ground. I have carefully followed the instructions found here and on Microsoft's site for creating Non-AD ftp user isolation sites. I've got a user test1 on domain Test. I have a folder named D:\FTPTest with a subfolder named LocalUser and beneath that a folder called test1. The user test1 has read - read and execute and list access to D:\FTPTest - same access to D:\FTPTest\LocalUser through inheritance and then the same rights plus write for D:\FTPTest\LocalUser\test1.

I have gone into the both the domain controller security policy and the local machine security policy under User Rights Assignment and added user test1 to Allow Logon Locally.

I keep getting this error: 530 User Test\test1 cannot log in, home directory inaccessible.

I've experimented with checking allow anonymous and tried other setting tweaks. Is there a new service pack related fix I need to know about. It seems like I've followed these instructions to the letter although I'm not positive about the logon locally part because the only thing I found close to that is "Allow Logon Locally" whereas in the instructions its "Logon Locally"

Thanks