User registration activation link 404

I manually register users from the dashboard, they receive the verification email with the link “siteurl/networksitename/wp-activate.php?key=###”

They click the link, however receive a 404 error while receiving their username and password in their email inbox.

My production and development servers are more or less the same, my development server works, however the production machine produces the 404.

Can anyone help, why am I receiving the 404 error?

OS: MS Server 2008
WP version: 3.3.1

I believe my config file may be at fault, however not 100% sure.

===========
web.config
===========

<?xml version="1.0" encoding="UTF-8"?>
<configuration>
    <system.webServer>
        <rewrite>
            <rules>
                <rule name="WordPress Rule 1" stopProcessing="true">
                    <match url="^index\.php$" ignoreCase="false" />
                    <conditions logicalGrouping="MatchAll" trackAllCaptures="false" />
                    <action type="None" />
                </rule>
                <rule name="WordPress Rule 2" stopProcessing="true">
                    <match url="^([_0-9a-zA-Z-]+/)?files/(.+)" ignoreCase="false" />
                    <conditions logicalGrouping="MatchAll" trackAllCaptures="false" />
                    <action type="Rewrite" url="wp-includes/ms-files.php?file={R:2}" appendQueryString="false" />
                </rule>
                <rule name="WordPress Rule 3" stopProcessing="true">
                    <match url="^([_0-9a-zA-Z-]+/)?wp-admin$" ignoreCase="false" />
                    <conditions logicalGrouping="MatchAll" trackAllCaptures="false" />
                    <action type="Redirect" url="{R:1}wp-admin/" redirectType="Permanent" />
                </rule>
                <rule name="WordPress Rule 4" stopProcessing="true">
                    <match url="^" ignoreCase="false" />
                    <conditions logicalGrouping="MatchAny" trackAllCaptures="false">
                        <add input="{REQUEST_FILENAME}" matchType="IsFile" ignoreCase="false" />
                        <add input="{REQUEST_FILENAME}" matchType="IsDirectory" ignoreCase="false" />
                    </conditions>
                    <action type="None" />
                </rule>
                <rule name="WordPress Rule 5" stopProcessing="true">
                    <match url="^[_0-9a-zA-Z-]+/(wp-*.*)" ignoreCase="false" />
                    <conditions logicalGrouping="MatchAll" trackAllCaptures="false" />
                    <action type="Rewrite" url="{R:1}" />
                </rule>
                <rule name="WordPress Rule 6" stopProcessing="true">
                    <match url="^([_0-9a-zA-Z-]+/)?(.*\.php)$" ignoreCase="false" />
                    <conditions logicalGrouping="MatchAll" trackAllCaptures="false" />
                    <action type="Rewrite" url="{R:1}" />
                </rule>
                <rule name="WordPress Rule 7" stopProcessing="true">
                    <match url="." ignoreCase="false" />
                    <conditions logicalGrouping="MatchAll" trackAllCaptures="false" />
                    <action type="Rewrite" url="index.php" />
                </rule>
            </rules>
        </rewrite>
	<defaultDocument>
            <files>
                <clear />
                <add value="index.php" />
                <add value="home.php" />
                <add value="default.php" />
                <add value="index.htm" />
                <add value="index.html" />
            </files>
        </defaultDocument>
        <httpErrors>
            <remove statusCode="404" subStatusCode="-1" />
            <error statusCode="404" prefixLanguageFilePath="" path="/index.php?error=404" responseMode="ExecuteURL" />
        </httpErrors>
    </system.webServer>
</configuration>