wordpress in subdirectory of exisiting wordpress site

I have installed the new site in a subdirectory (new) of the existing WordPress site while in development. I have done this before with non wordpress sites and have had no trouble viewing internal pages on the development site. In this case I can see the home page but all the other pages are trying to be viewed through the live wordpress install and I am getting a 404 error.
Is this what happens if there is a current live install or is there something I can change to tell it to view the internal pages on the development site.