Hi,
As it says in the documentation, http://www.mojoportal.com/multiplesitesbasedonfoldernames.aspx
Folder based sites can only be one folder deep, the first site must be a root level site it cannot be a virtual directory sub folder. The child sites will be at first level folders.
So you can have
http://localhost
as the first root level site and then you can have
http://localhost/Client1/Default.aspx
but you cannot have it 2 levels deep like http://localhost/CRM/Client1/Default.aspx
Hope it helps,
Joe