WP MU network – Posts and Pages Permalinks not working


I am setting up a network and using marketpress. I am currently working on setting up the primary site at Craftwing.com. The pages and posts work fine when using the default permalinks but when I change the permalinks to pretty permalinks as required by marketpress it breaks and when clicking on the links i get a 404 error. My custom permalinks I am trying to use is /%postname%/

I did notice that when I go to change the permalinks there is already a /blog/ already there in front of the field that I enter my custom permalink setting. When the pages are saved there is no /blog/ included in the url.

I have deactivated all the plugins and the problem still remains.

Any ideas how I can fix this? Thank you.