The FAQ entry I mentioned previously covers this topic.

The file that is named "directory" is actually a PHP script it simply lacks the .php file extension. The .htaccess file is used to instruct your web server to treat the "directory" file as a PHP script, but because there are different versions of Apache, and endless ways it can be configured, the exact line needed in the .htaccess can vary.

The .htaccess file is just a plain text file that can be edited in notepad.
The lines beginning with # are commented, ignored by your web server, so only lines that don't start with # are processed... but again, exactly which line to uncomment will vary depending on your server setup.