While running the setup I get the following warning (I changed the folder permissions to 777 using FTP):

"Setup could not change the folder permissions from loose (0777) to strict (0755). You will have to set the permissions manually."

Can anyone help me out here? Thanks!

No double posts (What about the note below the form is not understandable??)

You have to set the permissions via FTP manually, which is what the warning says. 777 is pretty loose so you might want to consider that. See the troubleshooting for the right permission settings.

My connection failed after sending the first post, I accidentally reposted when the connection was restored. Sorry about that.

I read the troubleshooting guide but I can't work it out. I set the permissions to 777.

Well, you will get that warning if the permissions are 0777. Next release you will be able to in essence say "yes, but that is what they must be" and not get the warning. However, that is not a secure server, so you really should find a way to have tighter security.