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Hi GrahamG,
For folder permissions, it depends on the operating system of your server. I will assume linux/unix as they are the most popular with hosting companies.
To chmod (unix command for changing permissions) a file is usually done with the FTP program. Connect to you site via FTP, navigate to the folder that you want to change. Select the folder, right click, and choose properties. On the folder properties you will see three sets of checkboxes titled - Owner - Group - World. Depending what is checked in these catagories will change the 3 digit number which is the folder's chmod setting. My suggestion would be just to change the numerical value of CHMOD to what XOOPS or the module is asking for.
Folders on the webserver are not writable by default for security reasons.
As far as uploading goes, you are right in your written assumptions.
For starters familiarize yourself with the FAQ on this site, and a great e-book for getting started "Xoops for Dummies" both links are in my signature.
HTH. And welcome to XOOPS.