Remember …. I could be wrong about this but I think you need to have new blogs set up under subdomains not subdirectories. That seems to be what fixed it for me.
Okay, I’m not sure what the problem is but here is how I fixed it.
First I totally wiped out all buddypress and WPMU files from the site. I then downloaded the SVN from this URL: http://svn.automattic.com/wordpress-mu/trunk. This gives you the WPMU 2.7 version which is still beta at this time but seems to work fine. After setting up WPMU and setting it up so that blogs come under a subdomain (ex. yourblog.yoursite.com) I updated my svn version of buddypress (https://svn.buddypress.org/trunk) and uploaded to the site and installed it. Everything is now working.
I have no idea why it wasn’t working before. I had tried to rewrite some of the code but to no avail. ANywho … doing it this way will get your site working. Also I think it may be important to use subdomains for the blogs. Not sure if that is true but I believe it may be.
