im pretty sure this is a bug in steam
I have just the regular file system (you can check it in disk utility mine says Format : Mac OS Extended (Journaled) which is NOT the case sensitive version) so this is not the problem.
Weird thing is that steam works on my old MBP, but does not on the new core i7 mbp I got (and simply did a transfer my mac on it).
What kind of machine do you have? (original poster)
Yeah it must be a bug in Steam as my old Core 2 Duo iMac has never had its HD reformatted - it's Mac OS Extended (Journaled) AND Steam gives the same case insensitive filesystem error msg on installation. I'm going to upgrade to 10.6.3 and see if this problem goes away.
I was able to install Steam on my MBP just like you.