Recently installed WPMU and have problem accessing images

I have installed WPMU using sub domains.

I can add sites and posts okay and upload images. However when I view the post the image is not visible.

I suspect it is a .htaccess problem so my file is pasted below

RewriteEngine On
RewriteBase /
RewriteRule ^index\.php$ - [L]

# uploaded files
RewriteRule ^files/(.+) wp-includes/ms-files.php?file=$1 [L]

# add a trailing slash to /wp-admin
RewriteRule ^wp-admin$ wp-admin/ [R=301,L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule ^ - [L]
RewriteRule ^(wp-(content|admin|includes).*) $1 [L]
RewriteRule ^(.*\.php)$ $1 [L]
RewriteRule . index.php [L]