Move site (folder) to IIS 7 server

I'm not sure how often this is asked and I have been doing searching for a while but haven't found what I need.

I have a website currently running on a 3rd party host, the website was developed by a 3rd party company. Previously I moved the website to a subdomain on the same server (no problems).

Now I need to move the website to an in-house server (R2 2008, using IIS 7). So far I downloaded the site via FTP (the full httdocs) and placed inside C:\inetpub\wwwroot. I want to use it locally now but eventually I will make it live. So my initial error is

Description: An error occurred during the processing of a configuration file required 
to service this request. Please review the specific error details below and modify your
configuration file appropriately. 

Parser Error Message: It is an error to use a section registered as 
allowDefinition='MachineToApplication' beyond application level.  This error can be 
caused by a virtual directory not being configured as an application in IIS.


"</pages><authentication mode="Windows"/>" 

I see many people have experienced this error, I followed a few solutions with little luck. I made it to a virtual directory but the error is the same. I think it's something to do with some authentication (at least that's my conclusion) becuase if I ommit these lines

</pages><authentication mode="Windows"/>
<sessionState timeout="50">
</sessionState>

I get this error

Module IIS Web Core 
   Notification BeginRequest 
   Handler Not yet determined 
   Error Code 0x8007000d 
   Config Error Configuration file is not well-formed XML  
   Config File \\?\C:\inetpub\wwwroot\tools2\web.config 
   Requested URL http://localhost:80/tools2/newsLetter/ 
   Physical Path C:\inetpub\wwwroot\tools2\newsLetter\ 
   Logon Method Not yet determined 
   Logon User Not yet determined 

IIs there some credentials I need to fill? How do I set up a user login for the server (do I need to)? What changes do I need to make to the web.config? Will I need to change settings if I was to move ir from local to public(live)?

Any good links will be helpful

Ok, So the problem was I didn't download the bin folder which is outside the httdocs, on top of that on ISS manager I right clicked on my site folder and chose convert to application, (which I needed to do) works smoothly now.