Problems with Offline folders

We are configuring a new environment for My Documents. We are using Windows server 2008 and WinXP SP3 clients.

The GPOs are set by the Win2008 server so we get the new GPP functions.

Our problem concerns creating files but NOT folders in My Documents. The folders are marked with the Offline

symbol and is synchronized with the Homeshare but the files are not!? When the client is offline the files

disappear from the My Documents folder but the folders remain.

We are synchronizing when logging on and off via UserGPO settings.

The Windows Event log does not provide any clues but the picture attached says that the files cannot be made accessible offline.

http://img.photobucket.com/albums/v292/Grifter_df2/Skit/fel.jpg

Ideas anyone?

Regards