drupal 7 does not work with subdirectory installations on a shared host

Hello,

I am installing Drupal 7.x-dev on a shared host (bluehost) and wanted to set up a git repository in the public_html/ folder. Because I wanted some other sites with subdomains, I wanted to put the actual Drupal installation under the public_html/trunk/ directory. But I did not want my website to have the /trunk/ subdirectory in all of the URLs. I would then make public_html/ the root of my git repository.

The default .htaccess does not appropriately forward requests, and the overlay functionality doesn't work. I keep getting "page not found".

This is how I set up /public_html/.htaccess:

# Use PHP5 Single php.ini as default
AddHandler application/x-httpd-php5s .php

RewriteEngine on

RewriteCond %{HTTP_HOST} !^www\. [NC]
RewriteRule ^ http://www.%{HTTP_HOST}%{REQUEST_URI} [L,R=301]

RewriteCond %{REQUEST_URI} !^/trunk/
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule ^(.*)$ /trunk/$1

RewriteCond %{HTTP_HOST} ^(www\.)?paperepiphany\.com$
RewriteRule ^(/)?$ trunk/index.php [L]

To fix this, I had to change /public_html/trunk/.htaccess (the .htaccess associated with the Drupal installation) to use the rule used in Drupal 6. Namely, change this:

  RewriteCond %{REQUEST_FILENAME} !-f
  RewriteCond %{REQUEST_FILENAME} !-d
  RewriteCond %{REQUEST_URI} !=/favicon.ico
  RewriteRule ^ index.php [L]

to this:

  # ... same RewriteConds
  RewriteRule ^(.*)$ index.php?q=$1 [L]

The other adjustment I made was to set $base_url="http://www.paperepiphany.com" in settings.php.

After making my changes, the site worked, but now the overlays just go to full page reloads instead of the nice AJAX-y overlays, which is a bummer.

I admit I'm not an expert in mod_rewrite, so if the original trunk/.htaccess file is correct, and I did something wrong in .htaccess, then what is the appropriate adjustment to make?

Even though the site does degrade gracefully wrt the overlays, I think it would be nice for the overlays to work even in this setup, because I don't think this is an unusual use case.