I am unable to complete the setup because of this "cannot connect to local host" error. I have an always on DSL connection through my router and I have tried to set it up without the firewall and virus protection being enabled. I view the hosts file and there is no hosts configured there. What am I missing? My internet browser, ftp, and telnet work normally.

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BOINC is in two parts, the worker, which is hidden, and the manager, or gui, which displays to the user what the worker part is doing.
These two communicate through a port. (Internal to the computer.) The "localhost" is the worker daemon on the SAME computer. (As against a remote host, which is a worker daemon on another computer.)
If these two parts can't 'talk', then you get the message that you posted.

So something is blocking the port.
It can be the firewall, or a Windows program grabbing it first.
A reboot can sometimes cure it, as can going to the menu, finding "Select computer", and clicking OK WITHOUT anything in either field.