Dear Matthias,
Those settings certainly will cause the issue and I make sure they're right during site setup, upgrade or a copy and reinstall, etc.
It turns out to have been something else in my case. Here is the path I took to getting into the situation and out of it, thanks to someone from Microsoft Online Community Support who really saved the day, noted below.
For anyone else running into quirks with IIS 5.1 on XP Pro SP 3, here is the answer:
1) If you've been setting up Virtual Directories per the DNN directions, I wouldn't. At the company I'm with now this was discovered to be buggy. Since IIS 5.1 on XP Pro only allows one website at a time, it is better to repoint the default website to different content as needed, for the purposes of development.
2) To fix the above, uninstall IIS via Control Panel | Add Remove Programs | Windows Components. Restart your machine and then reinstall by the same path.
3) And most critical, follow this link:
http://support.microsoft.com/kb/30600... which is an article titled "How to repair IIS mapping after you remove and reinstall IIS"
Another important point here is this: If this IS your issue you will get all sorts of DNN errors pointing you elsewhere. For me, making virtual directories when and where needed was making IIS 5.1 do what it wasn't designed to do: Host many sites. This had to be repaired by removal and reinstall which created other issues.
I googled "Server Application Unavailable" and quailfied this until I found this link:
http://forums.iis.net/t/1121142.aspx, the title being "IIS 5.1 - Server Application Unavailable - Reinstall doesn't fix it." There is input from one Zhao Ji Ma of Microsoft Online Community Support.
It was very hard to find this so if it's bothering anyone out there, bookmark these 2 critters. Zhao was a real hero here, I was in a pinch to resolve something on my dev environment to continue working at all.