lorax - 4:11 pm on Dec 5, 2012 (gmt 0)
@mrblond: I've done the following to help resolve issues similar to yours. Keep a copy of that htaccess file somewhere safe then delete it from the webserver. Login to the admin panel and go to Permalinks. Make sure they are setup the way you want them then save the permalink structure (even if you don't make changes). This will recreate the htaccess file - hopefully as it should be to work with the current install (eg no legacy code from the multi-site config).
The "same level" would be another subdomain, e.g. blog.example.com?
WP installs use HTAccess files to control URLs, redirects, etc - but unless you use the Network option, they are completely unaware of each other so placing two installs under the same directory structure lends itself to certain abuses/trouble like redirects. It's not impossible to do this - it's just easier to manage and avoid issues by separating them into completely separate directories.