I sounds like you did get the virtual folder setup right - it appears under the "Default Web Site". One thing you didn't mention is setting the permissions on the directory by right-clicking the installation directory icon, choosing properties and then the security tab. You then choose Edit and Add to add in your case with Windows 2003 the NETWORK SERVICE account and then give it full control permissions.
As far as the web.config goes the "Install" installation contains the Installation Wizard which will walk you through it and make the changes to the web.config itself so you do not need to mess with the file at all. You can view the video by following the " DotNetNuke 4.5 Installation Wizard Video" link on the first page of the Install forum or just click on the one I have provided.
If you would rather not use the wizard then you would set up your database as you have already done and modify only 2 lines in the web.config file. There are other amendments you could make but this is all that's required. There are 2 ways to go here as DNN provides 2 different connection strings possible to connect to your database (SQL Express and SQL2000/2005). The default is set up as SQL Express however my personal preference is to use the 2000/2005 string no matter what database you are using. I've found that it creates less problems down the road. In this case you would delete the lines:
<!-- Connection String for SQL Server 2005 Express -->
<add
name="SiteSqlServer"
connectionString="Data Source=.\SQLExpress;Integrated Security=True;User Instance=True;AttachDBFilename=|DataDirectory|Database.mdf;"
providerName="System.Data.SqlClient" />
then move the --> so that connection string line looks like:
<!-- Connection String for SQL Server 2000/2005 -->
<add
name="SiteSqlServer"
connectionString="Server=(local);Database=DotNetNuke;uid=;pwd=;"
providerName="System.Data.SqlClient" />
then modify the connection string with the "ServerName\SQLInstance" replacing the (local), insert database name, userid, and password to look something like this:
connectionString="Server=Piranha/SQL;Database=MikesDatabase;uid=mike;pwd=*********;"
the second connection string is done in the same way by deleting the text:
<!-- Connection String for SQL Server 2005 Express - kept for backwards compatability - legacy modules -->
<add key="SiteSqlServer" value="Data Source=.\SQLExpress;Integrated Security=True;User Instance=True;AttachDBFilename=|DataDirectory|Database.mdf;"/>
moving the --> and replacing the string like this:
<!-- Connection String for SQL Server 2000/2005 - kept for backwards compatability - legacy modules -->
<add key="SiteSqlServer" value="Server=Piranha/SQL;Database=MikesDatabase;uid=mike;pwd=*********;"/>
Save the file and your done. Browse to your localhost/virtualdirectory and the installation process will start.
Good luck,
Mike