I had similar problems with mine. I found that what was happening was that Linux wasnt encrypting the passwords correctly.
The ftp would connect but then say Password Incorrect or something
So passwords were eg: password123 in the encrypted field
instead of 08y24lko8s74o2ih39287 (with the encryption working)
so if u have installed a web gui such as webmin www.webmin.com
then go into users etc and change it to Normal Password and re-enter it. this SHOULD then encrypt the password properly this time.
The problem could probably be fixed on the actual box to but just fiddle with the passwords. I dont think your doing anything wrong cause i had the same problem.