.htaccess problems with permalinks and 404

I have a problem with my wordpress not showing my 404 page and not using permalinks.

I have followed every instruction but still not happening for me at all.

I have my site local on my laptop for developing the site, Its a Mac, 10.5.8, apache, php5, mysql.

I have changed the headding in the httpd.conf to read AllowOverride All.

I have a .htaccess file, so i blanked it all out again apart from the line, ErrorDocument 404 /index.php?error=404

Activated permalinks in wordpress on the custom option that looks like this:/%postname%/

I get the message updated.

I go back to my .htaccess file and it now reads like this.

# BEGIN WordPress
<IfModule mod_rewrite.c>
RewriteEngine On
RewriteBase /~iansmith/wordpress/
RewriteRule ^index\.php$ – [L]
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /~iansmith/wordpress/index.php [L]
</IfModule>

# END WordPress

I try to access a link in my site : http://192.168.2.101/~iansmith/wordpress/about-us/

and I get this:

Not Found

The requested URL /~iansmith/wordpress/about-us/ was not found on this server.

If I go back to default links, http://192.168.2.101/~iansmith/wordpress/?page_id=5, no problem but if I type in after this http://192.168.2.101/~iansmith/wordpress/?page_id=5akfjaksjfksj to get a 404 page I get the same error…… WOULD YOU BELIEVE IT!!!! I am now for some apparent reason getting my 404 page, ……. still not getting permalinks though…… any thoughts???

Cheers
Ian