Open Windows Eplorer and go to your DotNetNuke folder, right click and go to sharing and seccurity, Set permissions FULL to "NT Authority\Network Services" Account and propagate permissions to all the subfolders.

Most of the problems with the SQL connection are because Dot NetNuke needs a trusted account to communicate, read and write to the SQL Database (SQL Express 2005 and SQL Server 2005) this Databases need owner persmision set for the same account. Try this level of security first, in case you need more secure configuration then go down.

"The only scenario it will NOT WORK is when you have different language Operating System in your Web Server and your SQL Server. This because the for example in  English the name of the Account is: "NT Authority\Network Services" and in Spanish is: "NT Authority\Servicios de Red". It happen to my first installation and on the way to figured out this problem, I learned a little bit about how DotNetNuke works...