Blog sub cat not returning posts, just Page cannot be found

I′m new to WP and I use WP as pages 3.2.1. I′m trying to add the blog to my site.

My blog is subscription based and I have installed User Access Manager and Paypal Subscription Button

I have the drop down categories widget in site bar and when I click on sub cat I get Page Not found, When I click on the main cat I get to page where all posts in sub cats are listed. So far I only have one main cat and two sub cats.

I disabled the user manager plugin but that didn’t help.

When I created the sub cats, it creates the slug which open a page not found when I click on the cat′s name in drop down as there isn’t any such page, I have tried to delete the slug but it won′t go!

I created a test sub cat and in “Category Specific Permalinks” > URL Base: I put this code here /%category%/%postname%/ (which I did not in any of the other cats I created)

The only way for my site visitors to access posts is by clicking the drop down and choose one of the categories, Without this feature working the blog is useless!

Then I made two test post and added into the test sub cat, when I click the test sub cat in drop menu, I only get one post listed.

I have spent hours searching web and reading the docs but cannot found anything about this issue.

What am I doing wrong here?