I face the same problem.
After trying few times, I figure out how to do it.
hostname is your generic URL address.
For example : If your blog is https://www.panicanxietyaway.com/blog/
then your hostname is panicanxietyaway.com
your username is the name you use to log in to this hosting account and so do the password.
I am using WP 2.8.6 and I did not change the permission to 777. It remains at 755. I did nothing on CHMOD. All works fine.
Hope that helps.
Joe