Hmmm, that sounds like it should be correct.  Let me list what I would do to set up a new site, and let me know if you see anything that you might have missed.

1. Copy application to wwwroot (so that there is a path like c:\inetpub\wwwroot\DotNetNuke\Website)
2. Set permissions on the Website folder for machinename\ASPNET to have full control
3. Create a virtual directory off of the default website in IIS
   1. Call it, for example, dotnetnuke
   2. assign it to our website folder at c:\inetpub\wwwroot\DotNetNuke\Website
   3. Keep defaults to allow Read and Run Scripts permission
   4. make sure that ASP.NET tab shows 2.x version
   5. make sure that default.aspx is a default document
4. Make sure that a database is set up
5. Put database connectionstring in web.config
6. At this point you should be able to hit http://localhost/dotnetnuke to get access to your portal.

One other random thought, can you hit http://localhost itself without any problems?

Is that what you've done?  Let me know if that helps at all.

Also, I just read something about making sure that the anonymous user account has read rights, and about this tool from Microsoft: Authentication and Access Control Diagnostics 1.0