Thanks for your help. I couldn't figure out how to do it with the pathfinder but I was able to achieve the desired effect with a opacity mask.
Applies to CS4 (most likely CS3), not certain on previous versions.
1. Make your shape
2. Place your text on top, color it either white or black
3. select the text layer, choose Edit>> Cut
4. Select the shape
5. Choose Window>> Transparency
6. If you don't see a thumbnail image of your shape in the Transparency window, click the menu icon in the upper right hand corner and and choose show thumbnails.
7. In the same menu choose Make Opacity Mask
8. A black box will appear next to the thumbnail of your shape. (this is the mask) Next to that are 2 check boxes. [ ]Clip [ ]Invert Mask
9. Uncheck [ ]Clip. If your text is white check Invert Mask, if it is white leave it unchecked.
10. Click the mask thumbnail and choose Edit>> Paste in Front.
(note: paste in front, while pasting in front also acts like "paste in place" in indesign)
11.The text the background layers should now be visible through the shape where the text is.
12. Click the shape thumbnail to enter back in the document (nothing but the mask is editable when the mask thumbnail is selected, including all other layers). Click the mask thumbnail to edit the mask.
(note: The opacity mask is not limited to text, it can be any black, white or gray tone shape)
Alternatively, if you want to actually subtract the text from a shape:
1.Place the text over the shape, (color doesn't mater) but place it exactly where you want it to be subtracted from.
2. Select the text, right click it and choose Create Outlines
3. With all the text still selected, right click again and choose ungroup.
This is the important step
4. With all the text still selected, right click once more and choose Release Compound Path.
(note: don't worry about letters like aA bB dD... etc, having solid holes.
5. Select all the text and the shape it is to be "subtracted from"
6. Right click the selection and choose Make Compound Path.
7. The text should now be "punched out" of the layer and the letter "holes" should be respectfully filled in.
8. If you do not see the 'Make Compound Path' option than most likely one of your letters is still a compound path. 4 is important because if you simply convert your text to paths and try to make it a compound path with another shape it will not work as the letters themselves are compound paths and you can not make a compound path with a path that is already a compound path.