Exactly what i mean

So actually it is your whole WordPress site that is getting 404;s NOT just SP.
Did WP write the .htaccess file when you changed permalinks?

Yes, i have verified htaccess is getting written. I have also posted in WP forums and no one has answered:

http://wordpress.org/support/t.....?replies=2

Hoping someone here can help

Here are the logs when using SP and updating permalinks:

[Sun Mar 04 16:56:55 2012] [error] [client 192.168.123.165] ALERT - script tried to increase memory_limit to 268435456 bytes which is above the allowed value (attacker '192.168.123.165', file '/srv/www/problem-with-post-edit-buttontdocs/sites/teknerds/blog/wp-admin/admin.php', line 109), referer: http://teknerds.net/blog/wp-admin/admin.php?page=simple-press/admin/panel-forums/spa-forums.php

[Sun Mar 04 16:57:00 2012] [error] [client 192.168.123.165] ALERT - script tried to increase memory_limit to 268435456 bytes which is above the allowed value (attacker '192.168.123.165', file '/srv/www/problem-with-post-edit-buttontdocs/sites/teknerds/blog/wp-admin/admin.php', line 109), referer: http://teknerds.net/blog/wp-admin/admin.php?page=simple-press/admin/panel-integration/spa-integration.php

Here is the log when i edit the forum page in WP:

[Sun Mar 04 16:57:36 2012] [error] [client 192.168.123.165] File does not exist: /srv/www/problem-with-post-edit-buttontdocs/sites/teknerds/blog/forum, referer: http://teknerds.net/blog/wp-admin/post.php?post=67&action=edit

Here is when i access said forum page:

[Sun Mar 04 17:03:28 2012] [error] [client 74.125.156.80] File does not exist: /srv/www/problem-with-post-edit-buttontdocs/sites/teknerds/blog

Mod_rewrite is loaded and on.

so, the first says you are running out of php memory... you might want to try increasing yours... our faq has a quick and easy way to do that... but not likely the cause...

out of curiosity, when you installed wp in the subdir, did you follow all the wp instructions including editing the one wp core file?

http://codex.wordpress.org/Giv....._Directory

Editing that file breaks the whole blog, nothing works. I can't copy the index.php WP file to the root dir because i already have a non-WP site that has index.php in it.

hmmm... dilemma alright... wonder how wp handles that?  I mean those are the wp instructions...  have you checked their forums for any similar issues?