Do we need multiple folder of the game to run to instances on 1 machine properly?
No, 1 folder. If you needed multiple folders I would have mentioned that in the HOWTO If you don't have both the IS and ISBoxer updates, you will not be able to launch 2 instances.

Also, can you guys with the sound issues try Inner Space build 5478? It's a development build, just restart Inner Space and patch it up.