images not showing up in migrated WP 3.0 install

Moved my WPMU install to a new server and updated to 3.0 .
Setup is with subdomains.

Problem: Images not appearing.

The placeholders for the images are there.
The wp-content folder has a copiy of blogs.dir from the previous install. Accessed by direct path the images can be seen.
ie: blogname.domainname/wp-content/blogs.dir/3/files/2009/11/filename.jpg

Apache error logs say things like:

:[Tue Jun 22 09:48:19 2010] [error] [client 172.20.1.12] File does not exist: /Library/WebServer/Documents/files, referer: http://blogname.domainname/?p=380

Permissions are 777 (recursive) on wp-content/blogs.dir

htaccess file is writable. Contents of .htaccess:
__________________
RewriteEngine On
RewriteBase /

#uploaded files
RewriteRule ^(.*/)?files/$ index.php [L]
RewriteCond %{REQUEST_URI} !.*wp-content/plugins.*
RewriteRule ^(.*/)?files/(.*)wp-includes/ms-files.php?file=$2 [L]

# add a trailing slash to /wp-admin
RewriteCond %{REQUEST_URI} ^.*/wp-admin$
RewriteRule ^(.+)$ $1/ [R=301,L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule . - [L]
RewriteRule ^([_0-9a-zA-Z-]+/)?(wp-.*) $2 [L]
RewriteRule ^([_0-9a-zA-Z-]+/)?(.*\.php)$ $2 [L]
RewriteRule . index.php [L]
_______________________

Can anyone help?