Whenever I tried to create permalinks with the .htaccess, I kept getting Internal Server Errors. Then I found this site, where it mentioned that ftp gave the correct CRLF line terminators but other transfer methods did not.
But I have to use sftp or uploads, as my server always times out my slow ftp connection. So I opened Mozilla, copy/pasted my permalinks from the wordpress form in the Mozilla browser to notepad, named the file .htaccess and uploaded it. This fixed all my 500 errors, and I now have great working permalinks.
Anyway, if you're getting Internal Server Errors with .htaccess, it's something to try.