I could also add
- You are trying to load a game from the wrong partition
The partition number is not included in the path to the game sent to DIOS MIOS (Lite).
If you put your iso on the second partition of USB (USB2:/), DIOS MIOS will only receive from the loader "load this ISO : /games/blah/game.iso", and it will look on partition 1 (usb1:/games/blah/game.iso) and won't find the ISO, and won't find the Apploader either.
Be sure to use the latest version of the loader (CFG loader in your case), because if you are using an old one, it's sending "Setting v1" to DIOS MIOS (Lite), but It expect a Setting v2 since DM(L) v2.3
This is what "Your loader is using an incorrect config version" means. In this case, if a wrong Setting version is detected, DM(L) settings are set to default.
Default setting for DM(L) = load game from Disc!
If you don't have a gameCube disc in your drive, you will have "apploader not found" too. If you have a disc, it will load it instead of the ISO.
Note: Since DM(L) 2.3 it should display a warning "wrong setting version" instead of "unable to find apploader" if you are using an old loader.