After playing around with DNN 3.22, IIS5, .NET 1.1 and MSDE on XP pro and getting numerous errors like:
"Could not connect to database specified in connectionString for SqlDataProvider"

I finally figured it out and thought I would share my tips here.

get MSDE from:
http://www.microsoft.com/downloads/details.aspx?FamilyID=413744d1-a0bc-479f-bafa-e4b278eb9147&DisplayLang=en
grab the WebData Administrator from:
http://www.microsoft.com/downloads/details.aspx?FamilyID=c039a798-c57a-419e-acbc-2a332cb7f959&displaylang=en

I installed MSDE with "Mixed Windows and SQL mode authentication with network access"
using the following parameters:

C:\MSDERelA\>Setup.exe DISABLENETWORKPROTOCOLS=0 SAPWD="mypassword" SECURITYMODE=SQL


Then fire up C:\> svrnetcn.exe
and Enable the "Named Pipes" protocol and the "TCP/IP" protocol. Click on
"Properties" on the "TCP/IP"” protocol. Here, configure the
default port MSDE will be listening on if you want network access.
Default is 1433.

Then,run the SQL Server client network utility. Open a command prompt and type:
C:\> cliconfg.exe
Enable the "Named Pipes" and the "TCP/IP" protocols. Click on
"Properties" on the "TCP/IP" protocol. Here you configure the port
number you found with the "svrnetcn.exe" utility. Default is 1433.


Then fire up the WebData Administrator-> Server Tools, and create a new DataBase "DotNetNuke".
Then goto Server Tools and click on security -> logins -> Create new Login,
Authentication method = "Sql Login", give a name and password.
Goto Server Tools -> Databases and click on the newly created DotNetNuke Database and click on Users and "Create New User"
Pick the user from the dropdown box that you created earlier and then check the checkboxes "public" and "dbOwner" and click on "Save User".

lastly Edit your web.config under "app Settings" to include the user you created:

"add key="SiteSqlServer" value="Server=local;Database=dotnetnuke;uid=newuser;pwd=newpassword;" />

hope that helps someone out.