Problem with WordPress in Subdirectory

I recently installed wordpress to the subdirectory http://www.undergroundanimation.com/blog/ because i wanted to design my own homepage.

It seemed to work fine, however on a closer look the menus all direct to the homepage not the blog and the permalinks for the posts all direct to the homepage and not the posts.

I’ve tried changing the permalinks and only ended up with a 404.

Does anyone have any advice on whether this can be fixed or will I have to re-install wordpress as the index?