Thank you John. I got farther than ever before. Couple of questions:

1) Regarding the rights to the directory. When you right click on the dotnetnuke folder there is a tab Sharing that has a Network Sharing and Security, and also a tab "Web Sharing" which is set to share on default web site of IIS with alias DotNetNuke, but ther no way to add the asp.net/machine account. Is the Web Sharing setting the equivalent of adding the asp.net/machine account?

2) When I type http:\\localhost\dotnetnuke into the address bar of the browser I get the following error message:

Server Error in '/DotNetNuke' Application.
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Object reference not set to an instance of an object. 
Description: An unhandled exception occurred during the execution of the current web request. Please review the stack trace for more information about the error and where it originated in the code. 

Exception Details: System.NullReferenceException: Object reference not set to an instance of an object.

Source Error: 

An unhandled exception was generated during the execution of the current web request. Information regarding the origin and location of the exception can be identified using the exception stack trace below.  

Stack Trace: 


[NullReferenceException: Object reference not set to an instance of an object.]
   DotNetNuke.DataProvider.Instance() +243
   DotNetNuke.Upgrade.AutoUpgrade() +92
   DotNetNuke.Global.Application_Start(Object Sender, EventArgs E) +157
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Version Information: Microsoft .NET Framework Version:2.0.40607.16; ASP.NET Version:2.0.40607.16 

Do you (or anyone else) know how to proceed?

Thank you very much.

Alex