problem activating new site (blog) after moving from WPMU 2.x to WP 3.0.1

I had a WPMU 2.x (2.8, I think) up and running quite successfully. It was installed in a subdirectory of the main root directory of the web server (at myblogs.org/blogs/).

I successfully upgraded from WPMU 2.x to WP 3.0 (and then to 3.0.1) without any problems, and the 4 blogs are working fine.

The problem comes when I attempt to create a new blog. Here’s what I’m noticing..

1. Under the “Add Site” section, the Site Address is prefilled with mydomain.com/blogs/ followed by an empty box, which I filled in with what I wanted for the new site (e.g. ‘testblog2’). BUT, after the site was created, the path was given only as /testblog2 rather than as /blogs/testblog2.

2. I can’t visit testblog2….when I click “visit” (which takes me to http://www.myblogs.org/testblog2) I get a 404 page error. I am able to get to the Edit page but not the Backend page (404 error).

What seems to be happening is that there is some issue with how WP 3.0.1 has set up the path.

I’m providing My .htaccess file and the relevant portion of my wp-config.php file below, since I suspect that they may be relevant here:

.htaccess

RewriteEngine On
RewriteBase /blogs/

#uploaded files
RewriteRule ^(.*/)?files/$ index.php [L]
RewriteCond %{REQUEST_URI} !.*wp-content/plugins.*
RewriteRule ^(.*/)?files/(.*) wp-includes/ms-files.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>
</Files>
</IfModule>

wp-config.php

/** The Database Collate type. Don't change this if in doubt. */
define('DB_COLLATE', '');
define('VHOST', 'no');
$base = '/';
define('DOMAIN_CURRENT_SITE', 'myblogs.org' );
define('PATH_CURRENT_SITE', '/blogs/' );
define('SITE_ID_CURRENT_SITE', 1);
define('BLOGID_CURRENT_SITE', '1' );

Finally, a question about the way WP works in a multi-site environment. I’ve noticed that when going to an existing, working blog, the URL is http://myblogs.org/blogs/blogname/etc. There is no subfolder on the file server at /blogs/blogname. How does WP, or more importantly, my web server, know where to reroute http://myblogs.org/blogs/blogname/etc since it isn’t going to a real subdirectory named ‘blogname’

Thanks in advance for your help.