It is great to check the forum for problem solving. Was working on a WP 3.0 site and subsites. teaching mah-self the ropes. One installation went flawlessly (well almost8-)) ) and another fresh install on another domain did not work.
After checking around with Transmit 4 I found I could not edit the .htaccess file. Beats me were things went differently, but anyway. I set the permissions to 644 and presto! My subsites popped up and no more 404's!
Thanks Scott, great to have you around!