How do you create a development site into a subdirectory of the live site?

if your using the same database you just copy the entire site over .. if you want to use the same database with its own tables for storage, delete the wp-config file and as your setting up the 2nd WordPress site just select a different table pre-curser .. the first would be wp_ .. the second may be wp2_ and so on .. with the same database details (name user pass) once you have the site installed you can export the data from one and import it into the other using the WordPress tools export and import.

it sounds harder than it is