By default SME has permalinks disabled, to enable them, issue the following command:
db accounts setprop ibayname FollowSymLinks enabled
db accounts setprop ibayname AllowOverride All
signal-event ibay-modify ibayname
REPLACE "IBAYNAME" with the name of your iBay
Once you issue this command, than you have to create .htaccess as instructed by wordpress.
And, just a FYI, you will not be able to upgrade to the next wordpress release 3.5 since it will require
* PHP version 5.2.4 or greater
* MySQL version 5.0 or greater
and this is not available in SME until v.8 is out (god knows when)