If you can't find anything wrong with your server setup, here's another thing you can try.
From what you've said, you had your blog working correctly before the update. It looks like you are running WordPress on a windows server (IIS) so you probably did a manual install.
Your admin login is still up is see. Depending on how long you went between installs, I might suggest backing up your wordpress database from the admin console in 2.8 (just in case), backing up your theme and plugin files, deleting your /blog folder, and doing a fresh manual install of the latest version.
If configuring the database in the wp-config.php brings back everything, great. Otherwise make a new sql database, configure it in wp-config.php, run the install script at /wp-admin/install.php and then upload your 2.8 database backup.
Dump your theme and plugin files in. This should get everything running.