I am also having the same issue as the OP.
I’ve tried having the same .htaccess file – I even tried adding in
Options +FollowSymLinks
to no avail. As well, I tried to see if I was having the dropped folder issue beccaC mentioned, but everything I changed it to seemed to still result in the site’s inability to run with custom permalinks.
Is there anything someone could think of that would make this not run? I’m on an Apache server. I have another site on there that has never given me issues with a mod rewrite, so I know it’s activated. I checked the other site’s rewrite code & even used that to create the WordPress one to no avail.
Could there be something I left unchanged in the database import that would cause this? I’m at wit’s end.