Here are the steps that I followed to successfully configure multiple stores in Magento that use subdirectories.
I already had a store successfully configured and running (mystore.com) however I wanted to add a second store using the exact same design and products and have it exist as a subdirectory (mystore.com/secondstore). Also note that I was running Magento ver. 22.214.171.124.
1. First I followed these instructions (specifically the ‘Subdirectory Method’) http://www.crucialwebhost.com/kb/how-to-setup-multiple-magento-stores/
2. Then within System > Configuration > General > Web, and with my secondstore website selected under ‘Current Configuration Scope’, I changed both the Unsecure and Secure Base Link URL to include ‘secondstore/’ at the end. I did this to ensure that when users were navigating in mystore.com/secondstore they remained in the secondstore - otherwise all the links would take secondstore users back to mystore.com.
3. In step 1 I had copied the index.php and .htaccess files to my /secondstore directory that I created, additionally I had to change…
$mageFilename = MAGENTO_ROOT . '/app/Mage.php';
...in secondstore/index.php to…
$mageFilename = MAGENTO_ROOT . '/../app/Mage.php';
...otherwise I was getting the ‘app/Mage.php was not found’ error.
4. At this point the mystore.com/secondstore site would load but no products were displaying, even though I configured the mystore.com/secondstore website to use the same product categories as mystore.com in step 1. In order to get the products to appear I had to go to Catalog > Manage Products > a product > Websites and actually check off the secondstore website. Then the product would appear.
5. Because I wanted the mystore.com/secondstore website design to appear identical to the original mystore.com website, I had to set the secondstore to use the same design. I did that in System > Design, click the Add Design Change button and choose my secondstore store view for the Store dropdown and then choose the same Custom Design from the dropdown that I was using for mystore.com.
6. I also wanted the exact same ‘home’ page for both sites, so under CMS > Pages I edited the ‘home’ page so that Store View page was set to All Store Views.
Keep in mind I did all of this on a test website and randomly cleared my Magento cache and reindexed several times throughout the process.