Garry's Mod not extracting files that it downloads

I believe this is a problem with my server and not my client. I have a fast download server setup at http://chi.erdaniels.com:8080 and when I download files from there and place them into downloads they work fine.

But when gmod downloads the files it appears that it actually never extracts them but instead just renames them.

For instance:
murcigla.vmt actually contains the binary for what is murcigla.vmt.bz2 and if I extract murcigla.vmt I get the real murcigla.vmt with the correct data.

Is there a command I am missing on my server that isn’t telling the client to actually extract the files?

Other servers appear to work great and actually extract the bz2s they download

Thank you!

EDIT: I am running on Ubuntu 12.10 and I am using SourceRSC with Mono to sync to my http server which is local to the machine as well.
My server ip is 74.63.65.6:27015

See http://forum.facepunch.com/showthread.php?t=1250354

Thanks. contributing to that thread now.