theelite,
The path that should be input for the "Directory for phpBB" is the relative path from the DOCUMENT_ROOT of the website...
Default Case:
So if phpBB is at
www.yoursite.com/forum then the Directory should be set to "forum"
Alternate Case:
So if phpBB is at
www.yoursite.com/forum/phpbb2 then the Directory should be set to "forum/phpbb2"
The answer to your first question is yes... Without that directory set correcly then nothing in the connector will work correctly because it won't know how to get the phpBB files so it can find the tables, login functions, etc.
Hope this helps,
Greg