I then went to Options>Permalinks and input http://www.domain.com/matt/blog/archives/ (actually "/matt/blog/archives/%year%/%monthnum%/%day%/%postname%/") for the the permalinks location.
WordPress then asks me to update my .htaccess. I have both updated the index.php and .htaccess in the http://www.domain.com location.
WordPress still asks for me to update the .htaccess and I have no idea what the problem is. Can someone help?