first check your to see if you have an .htaccess file in the top level of your blogs directory - if not create one and set the R/W Permissions for the file to 777
Next open the file and insert this code
<IfModule mod_rewrite.c>
RewriteEngine On
RewriteBase /blog/
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /blog/index.php [L]
</IfModule>
Save the file
Next go to your Admin Dash board and select settings -> permalinks
Under common settings choose Custom Structure and paste in this code : /%category%/%postname%/
Save Changes and you're all set for further info or other coding you can use go here:
http://codex.wordpress.org/Using_Permalinks#mod_rewrite:_.22Pretty_Permalinks.22