So you're running a file version served by VS.  If you open VS again, and right click default.aspx - view in browser, does it work? 

Normally, for the app to work via a call to a URL, it needs to be in IIS (as best I can remember).  I'm not sure you can browse to a file based version (VS200x) of a site while VS is not running. 

If you added a record in your host file - you should be able to ping it.  But that will not make the machine serve the page.  Out of curiousity, what IP did you assign that url in HOSTS?

Try opening VS and then in IE, type in localhost/DotNetNuke - it should be cached as well unless you cleared that. 

I have created a new nuke on winXP machine using "Files" then created a website in IIS on Windows Server 2003 and copied the nuke files onto the  server. When I try browsing the website on the server http://localhost/DotnetNuke I get the error "File cannot be found". I get the same error when I try to access it from the XP machine using http://Myserver/DotNetNuke

What  am I doinmg wrong?

It appears as it he has deployed via local file using VS. At least one can infer that from his original post:

"It runs ok the first time of going through the portal build" 

EDIT

After seeing your latest post, it would seem you have a few issues to work through.  Just copying the files to another machine will not work until you've adjusted the settings in web.config. 

Your best bet would be to get the starter kit and deploy a new DNN install to the Win2k3 server via HTTP.  Then you could do the following:

1. Backup that DNN's web.config - you will need the DB connection settings and machine key information (see the upgrade/install doc for details)
2. Copy over the files from teh live site to that new DNN site. 
3. Attach your live DB files to the SQL server for the Win2k3 server - do not overwrite the new DNN db
4. Open WEB.config and copy over your DB connection settings and the machine keys from your backup of the new DNN install. 
5. Change the connection strings in the web.config to match the live site DB name (you just attached), user ID and password
6. Open the table portalalias from the new DNN install DB, and copy the HTTPAlias info (portal should be '0').
7. Go to the freshly attached (from the live site) DB's, open the same table and enter the copied info into the default portal ('0'). 

You should be able to reach that DNN install then by using the alias you copied, or by browsing to the IIS folder and browse the default.aspx file from within IIS.