I'm running SQL Server 2005 Express.
With regard to the Application Pooling, I'm not too sure.
I had previously experimented by selecting properties of the virtual folder, then clicking create under application settings.
This changed the error....... into an even bigger one.
I suspected that create application is similar to compiling a program, and may indeed be a way of compiling VB,C# etc source code into binary, but that is merely a guess.
I also suspect that browsing to http://localhost/DotNetNuke does the same sort of thing that the Visual Web Developer Starter kit does when you hit Ctrl F5, runs through the web.config, creates a database etc etc.
I have a hunch its an ASP 2.0 security issue, I remember reading a post about Medium trust, but it didn't seem 100% relevant, as I felt sure it was for the DNN 3 upgraders.
Again all guess work......