Yes, you could have also moved the physical directory.

There is no problem with running DNN with other sites on the server, even ASP.Net 1.1 apps.  What you need to be careful about, and this point is not clear from your post, is that the DNN 4.5 site must use ASP.Net 2.0, you may know that you specify this in one of the tabs of the IIS manager for the site.  In the setup you had before, running DNN from a virtual dir of a site, if the parent site must have .Net 1.1, and the virtual dir needs 2.0, you are going to have problems.  For this reason is that I always recommend to just create a new Web site and in that way you can keep things straight and separate.  Another potential problem is if you use a directory structure where the DNN dir is below the root of another ASP.Net app directory, as the Web.config files will clash.

Now, even in your test server you can have a separate site for your new DNN install.  I do this in two ways depending of what I want to accomplish.  One way is to use a subdomain, like DNNTest.yourdomain.com.  In this way you define dnntest.yourdomain.com as both the Host Header and the PortalAlias for the new DNN site (assuming that yourdomain.com works and points to the same server).  The other way is to create a totally bogus domain like DNNTEST.COM, and define it in your Hosts file with the address of your server.  Then, you use that domain name in the Host Header and the PortalAlias for the site.  The problem with the second approach is that it does not work for everybody on the network right away, other testers/developers would have to also modify their Hosts file.  But with the second approach you can create multiple bogus domains and test the multi-portal feature of DNN, you can have DNNTEST2.COM, DNNTEST3.COM, etc.

Going back to your reinstall question, I would have deleted all the files from the DNN directory and unzip the Install package again to really restart from scratch.  During the installation process DNN does work on files in the install directory in addition to create all the database structures in the database.  Before deleting the files, you may want to keep just the Web.config.  But if you use the 4.5.1 installation Wizard it will help you with the connect string to SQL 2000 too.

Carlos