Situation:
Nusphere debugger running on XP box.
Php app running on a server in next room (ubuntu,apache,php).
Access to files via mapped network drive (samba share, drive R:), R: mapped to \\machine\share, which is /var/www
App located in /var/www/myapp
Apache DocumentRoot is /var/www

So url is http://machine/myapp, first program is http://machine/myapp/index.php, nusphere machine sees files as in R:\myapp

I have project settings as follows:
Project:
Project: c:\program files\nusphere\phped\project\myproj.ppj
Root Directory: R:\myapp
Source Control : none
Publishing:
Account: blank
Publishing directory: blank
Don't publish directories: CVS;.svn
Mapping:
Run mode: HTTP mode (3rd party web server)
Root URL: http://machine/myapp
Remote Root directory: /var/www/myapp
Files:
Default file to run: r:\myapp\index.php
Hide files: blank
Hide Diretories: CVS;.svn
Code insight includes: Blank

This works fine in debugger - have I set it all up right ?

Absolutely.
If you have any file beyound /var/www/myapp directory tree included in your application, you'll also need an extra mapping entry for it.
For example, if you have /var/www/mylib/somefile.php included in /var/www/myapp/somewhere/myfile.php
you'll need mapping:
local: r:\mylib
remote: /var/www/mylib
url: does not matter (leave it empty)