Hi Warren,
That shouldn't be a problem. I believe most site owners would handle this by just installing a separate WordPress into the development folder (and, of course, having any themes, plug-ins, etc go under that install) and setting up a separate MySQL database (you don't have to do it this way, but many find it helpful for organizational purposes and would help to ensure you don't accidentally overwrite anything for your "live" version). Here is a link to a recent thread on this topic:
http://www.futurequest.net/forums/sh...ad.php?t=26368
You can password protect the development directory as well if you want to keep it under wraps while you work on it:
http://service.FutureQuest.net/kba14
Hope this helps,
Melissa