Problem with permalinks not found

I’m testing with a environment of php/mysql/apache/wp 2.7 on my local pc and have Got a problem with permalinks … keeps saying 404 Not found e.g I have created a page called Another Page. I have set my permalinks to be Custom – /%category%/%postname%

and my .htaccess looks like this:

# BEGIN WordPress
<IfModule mod_rewrite.c>
RewriteEngine On
RewriteBase /test/
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /test/index.php [L]
</IfModule>

# END WordPress

anyone tell me whats going wrong??
TIA