.htaccess trouble

I have a simple (only 2 posts and no pages) test WP blog installed on a remote web host. I’m trying to work on a copy of it off-line on my localhost. I started by adding a new wordpress to my local host, then copied the wp-include folder from remote host to the new localhost wordpress. Export/Import databse. Start and install WP and follow steps to create config.php file.

All works as should. Blog appears on localhost with the 2 posts and the theme appearance and etc just as it does on remote host.

Problem – If I click on “view” post I get page not found error 404. I have been advised that I need to go to Settings>Permalinks and then click save. As soon as I select Settings>Permalinks a .htaccess file is added to the WP on localhost, the dashboard display becomes not correct and if I click save I get error message. From that point on I cannot access the blog on localhost at all. If I delete the .htaccess file I get back to where everything works except as detailed at the top of this post.

So I believe I need to configure the .htaccess file and/or possibly some other configuration settings I need to change. I just can’t figure out what I need to do to get this working correctly. A link to the .htaccess files is below. One file from original remote host the other created by WP when I go to Settings>Permalinks

http://www.openrangeimaging.com/Test/htacess.jpg

Any advice on how I might get this resolved will be very much appreciated