It may be helpful to outline the basic (logical) workflow:
Domain (uses) -> DNS (which points to) -> Server (which has) -> IIS (which loads) -> Web Site (generally based on) -> Host Header
This travels the path through the domain to your web application (DotNetNuke instance).
Once your DotNetNuke instance is loaded, the portal alias table is queried to find out which portal it should load, based on the incoming request.
To get to the point though - you'll need to create a "new web site" in IIS (you can remove your virtual directory) that points to your application root (file system). You can then configure it to use the proper host header (make sure you don't have the host headers used on any other sites that you were playing with...).
Also on your new web site - make sure you have A) a default document (default.aspx) B) application created, "Scripts Only" enabled C) ASP.NET 2.0 selected
Let me know how it goes!
Take care,
Ian