Here is a link I just found for others having a similar problem. This helped me to realize my problem could be beyound the apache set-up.
Here is the troubleshooting section from this link.
Here are some of the most common problems I've seen people have (or have had myself) with .htaccess files. One thing I should stress first, though: the server error log is your friend. You should always consult the error log when things don't seem to be functioning correctly. If it doesn't say anything about your problem, try boosting the message detail by changing your LogLevel directive to debug. (Or adding a LogLevel debug line of you don't have a LogLevel already).
'Internal Server Error' page is displayed when a document is requested
This indicates a problem with your configuration. Check the Apache error log file for a more detailed explanation of what went wrong. You probably have used a directive that isn't allowed in .htaccess files, or have a directive with incorrect syntax.
.htaccess file doesn't seem to change anything
It's possible that the directory is within the scope of an AllowOverride None directive. Try putting a line of gibberish in the .htaccess file and force a reload of the page. If you still get the same page instead of an 'Internal Server Error' display, then this is probably the cause of the problem. Another slight possibility is that the document you're requesting isn't actually controlled by the .htaccess file you're editing; this can sometimes happen if you're accessing a document with a common name, such as index.html. If there's any chance of this, try changing the actual document and requesting it again to make sure you can see the change. this isn't happening.
I've added some security directives to my .htaccess file, but I'm not getting challenged for a username and password
The most common cause of this is having the .htaccess directives within the scope of a Satisfy Any directive. Explicitly disable this by adding a