After scratching my head, searching these forums and testing a few things out I noticed that some template design software packages do not fully support permalinks.
This is a big cause for the permalinks option/addon not to work in AutoBlog.
I was using Artisteer (I bought it years ago when better packages weren't really available/affordable). This still continues not to fully support permalink structures (in v4).
I have done a quick test with TemplateToaster (the new beta anyway) and this does fully support it and also has many other features (HTML5, Responsive Layouts, etc).
I just thought I would share this for those that are using packages like Artisteer and are having trouble with permalinks in addons such as AutoBlog.