WordPress multidomains and subfolders

According to this codex entry, it is not possible to install WordPress in a sub-directory and use the Sub-domain install.

However, you should be able to install WordPress in a sub-directory (example.com/foo) and use the other sub-directories for your networked sites (example.com/bar).

Also, check out this entry for more info on installing WordPress in a separate directory and using it to power your root.