It appears that the ability to insert images in posts is completely broken due to this problem.
My server shows the following date/time:
Fri Dec 4 20:06:38 2009
When uploading my first 2 images via the Flash uploader, WordPress creates the folder structure /blog/wp-content/uploads/2009/11
Clearly, it is not Dec. 1, so there should be no confusion about whether it is December or November due to time zones.
All URL's and img src links point to /blog/wp-content/uploads/12/* and thus do not display because the images are actually in the /blog/wp-content/uploads/11/* folder path.
No matter how I try to upload images to the media library, the system will NOT create the 12 folder. I finally gave up and created it manually. Even after creating the folder, images STILL do not upload to that location and end up in the 11 folder instead.
Once the 12 folder is created and the images moved there via a separate FTP client, the images are displayed properly in posts.