Permalinks and Comments

Hello all. I have been trying to get permalinks to work on my site (using 1.5). When I click on a category link it works fine, but when I am in a category archive and click the ‘comments’ link (e.g. http://www.mysite.com/%archives%/#comments) I get file not found.

One thing about my site is that I have placed index.php in my root directory and the rest of the program in the /wordpress folder. Maybe this has something to do with it?

Any ideas on how I can get permalinks to work?
Thanks!
~shiva