Yes, run bitcoind instead of bitcoin.
If bitcoind isn't working, but bitcoin-qt is working, then do this instead:
bitcoin-qt -server -datadir=1
bitcoin-qt -server -datadir=2
This will only work if you run the commands from inside the testnet-box folder. Alternatively specify full path names to the 1 and 2 folders: datadir=/home/chris/testnet-box/1 etc.
You need to download the testnet-box.zip file and extract it. That will make you the two folders 1 and 2. Both folders have testnet blockchain files, a wallet, and a bitcoin.conf.
Folder 1's bitcoin.conf says:
rpcpassword=123 # Set this yourself.
noirc=1
testnet=1
so it will run a testnet instance, not connect to IRC, and set the password to '123' for RPC connections.
Folder 2's bitcoin.conf says:
rpcpassword=123 # Set this yourself.
noirc=1
testnet=1
rpcport=19332
nolisten=1
connect=127.0.0.1:18333
which is the same as the other except that it listens for RPC connections on a different port, doesn't listen for incoming P2P connections at all, and only connects to the other instance.
There shouldn't be a port conflict. The first will be listening on port 8332 for RPC connections and port 18333 for P2P connections. The second will be listening on port 19332 for RPC connections, and not listening for P2P connections at all.
Note: if you're running the 0.6.0 release candidate, the nolisten=1 in node 2's bitcoin.conf won't work. You'll need to change it to listen=0 due to a bug I found and reported while researching this answer.
