If you are installing on Windows XP, it appears that the install was configured for Windows 2003 and it gave some rights to the NETWORK SERVICE account instead of the ASP.NET account.  In your website directory, first of all you need to give full control access to the account that ASP.NET is running under.  This may be different depending upon your configuration and if user is anonymous or not.  First, to narrow down if this was the issue, I basically gave all users full access to the website directory, I actually need to now go and remove this one by one just to make sure I get what is really needed. 

Through the Windows Explorer,
    1) right click on the website directory (e.g. c:\inetpub\wwwroot\dotnetnuke)
    2) select Sharing and Security
    3) select the Security tab
    4) Add ASP.NET, the anonymous account configured for the website, and even go ahead and the 'Users' to the persmissions.  Give all Full Control.  This is adding more than we need, but it may get you at least working to see if this is the issue, then remove permissions later.
    5)  Go to the App_Data directory under your website and right click on the two Database files.   Here make sure that ASP.NET account also has full access to these. 

I was able to track down my issue by going to the Control Panel \ Administrative \  Event Viewer and view errors that were generated by SQL Express. It stated that access was denied to the Database.mdf file.

Since you are running SQL Server, and not Express, from other posts I understand that you will have to change your connection string in the web.config place in two places.  You may need to search for these other posts with the same error.  I also did some testing with the VS Service Explorer to verify that I could connect to the database.

Hope this helps, I may have done some other things, I was trying things right and left in order to get things working and these were the last couple of things I recall I did  :)

Ron

Sorry didn't work.  I think that you may only have the Security tab if you are part of a domain.  Be sure to check the Event Viewer for any errors there, that is what helped me track down my problem.