Have you ever tried publishing to a local drive? That would be the first thing I would try to figure out if it was a server/network thing.
Well, it gave us a Preview button, which showed us the published project locally... it all looked good... so I think the answer to your question is yes.
What is the error message you receive when you attempt to publish?
You were rather vague about it and just said "some error about being unable to create files".
I've seen where some have issues with publishing because the output folder contains a thumbs.db file. This is a Windows file that gets created in the folder when thumbnail images are enabled. I think that file causes the publish process to gag. Perhaps check for that?
I think you get that Preview dialog screen even if you publish to a
network location - it's the location of the published files in the
Properties of the Layout that dictates where the generated help is going
to go. I seem to remember that the Generate dialog has the same info as
the Properties screen when you go to create the help. Did you use a
local c:\ drive for that?