there seems to be some problem with the file set that you are uploading in trying to upgrade.
the upgrade instructions are relatively clear. you download the upgrade package, you unpack the upgrade package locally, then ftp the files up to your current instance. there is an upgrade directory included with the upgrade package. the .htaccess needs to be removed from the upgrade directory in order for you to call it in the browser.
if you are getting the install directory, im going to go out on a limb here and state that you are not uploading the upgrade package, but the full 7.0.7 package.
http://www.boonex.com/trac/dolphin/wiki/7.0.6-7.0.7
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