Thanks for confirming that there's nothing wrong with your Hot Potatoes exercise or the HotPot module.
My hunch at the moment is that your issue is caused either by incorrect access permissions on your server, or incorrect folder names.
However, the only way to say for sure is to examine the error logs on your server.
FYI, the "Internal server error" is displayed when an error occurs on the server, but the server is set up not to display error messages to the browser. You need to either change the settings so that server errors are displayed to the browser, or you need to find out where the error logs are on your server and examine them yourself.
If you are willing and able to let me come and look at your server via SSH or a your web hosting control panel, please contact me via the messaging system on Moodle.org