Problem with uploading media

When users upload media(either photo or music), they successfully show up in my server, but users can’t view them at all….

I think this has to do with subdomain because when I install MU with subfolder option, everything works perfectly.

Some details:
My website domain is “bluewhalefamily.com”

For example if a user creates a new site called “icecream.bluewhalefamily.com”
When she upload media, wordpress shows that the photo is stored here:
http://icecream.bluewhalefamily.com/files/2012/04/icecreamsphoto.jpg

But actually the photo is stored here in the server:
http://bluewhalefamily.com/wp-content/blogs.dir/9/files/2012/04/icecreamsphoto.jpg

So if I type in the second (real) url, I’m able to open that photo, and the first url gives me 404 error.

My guess is there is something wrong with my redirection setup.
I believe I did follow the instruction correctly when setting up Mu, still here is the .htaccess file:

RewriteEngine On
RewriteBase /
RewriteRule ^index\.php$ - [L]

# uploaded files
RewriteRule ^files/(.+) wp-includes/ms-files.php?file=$1 [L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule ^ - [L]
RewriteRule . index.php [L]

I also tried to change folder permission of blogs.dir and wp-content from 755 to 777 (I feel I shouldn’t do that, and I changed it back)

And I’m using the latest WordPress 3.3.2 with Buddypress 1.55 also latest

Really appreciate anyone’s help. Thank you!