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marley: I would really appreciate a way to set deadzones, too!
My custom dosbox replacement adds a deadzone function:
http://www.davidwaltersdevelopment.com/tools/dosbox/
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sndwv: What solved it for me:

Edit dosbox_tv_single.conf in your Terminal Velocity installation folder using notepad.
Add a bit about joysticks to the top so that it says:

[joystick]
timed=false

[ipx]
etc...

Start the game, recalibrate and it should work.
I did this.. it made i where the joystick is configurable in game.. but I have no control over the ship.. I can't pull up or down