Upgrade to 3.0.1 Problem

I’m trying to upgrade to 3.0.1 from the 2.9.1. Here are the steps I did:
1. clicked on the auto upgrade button within dashboard (it was successful)
2. Noticed the message at the top of dashboard that read “The wp-content/blogs.php file is deprecated. Please remove it and update your server rewrite rules to use wp-includes/ms-files.php instead.”
3. Removed blogs.php
4. Changed blogs.php to ms-files.php within .htaccess

Once I do step 4 all my images go away within my main blog and within all my users’ blogs. The images I’m referring to are the images that users upload to their library and insert into posts.

If I undo steps 3 and 4 the images show up again. I think the problem lies within my .htaccess. Here’s my .htaccess.

What do I need to fix?

# Use PHP5 Single php.ini as default
AddHandler application/x-httpd-php5s .php
RewriteEngine On
RewriteBase /

#uploaded files
RewriteRule ^(.*/)?files/$ index.php [L]
RewriteCond %{REQUEST_URI} !.*wp-content/plugins.*
#RewriteCond %{REQUEST_FILENAME} -f [OR]
#RewriteCond %{REQUEST_FILENAME} -d
#RewriteCond %{HTTP_HOST} !courses.domain.org
RewriteRule ^(.*/)?files/(.*) wp-content/blogs.php?file=$2 [L]

# add a trailing slash to /wp-admin
RewriteCond %{REQUEST_URI} ^.*/wp-admin$
RewriteRule ^(.+)$ $1/ [R=301,L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule . - [L]
RewriteRule  ^([_0-9a-zA-Z-]+/)?(wp-.*) $2 [L]
RewriteRule  ^([_0-9a-zA-Z-]+/)?(.*\.php)$ $2 [L]
RewriteRule . index.php [L]

<IfModule mod_security.c>
<Files async-upload.php>
SecFilterEngine Off
SecFilterScanPOST Off
</Files>
</IfModule>
# For security reasons, Option all cannot be overridden.
#Options All -Indexes
Options ExecCGI  Includes  IncludesNOEXEC  IncludesNOEXEC  MultiViews  SymLinksIfOwnerMatch  Indexes -Indexes