Wow... Normally, when a problem like this happens to me, I eventually find that I was missing something. It sounds like the same might happen with you. You certainly sound like you know what you're doing though. Getting the source version to install is almost no different than a typical installation.
I was able to see one thing to check though. When I compared your connection string against some of mine, I saw something different. Mine all use "Data Source" instead of "Server', and "Initial Catalog" instead of "Database". If I remember correctly, I believe I read in the SQL Documentation that these two property names are interchangeable. Therefore, changing them should not change anything in your situation - but it was a difference that I was able to note.
I can complete understand and sympathize with your frustration, as I have gone through it too. :(
Due to the nature of your final error though, I can only assume that your installation is missing something...
- IIS using .Net 2.0, anonymous account should be IUSR_<machinename>, integrated security checked, application has Execute permissions on scripts and executeables, and the read/write checkboxes checked - and the virtual directory should be pointing to the web site directory in the source
- Folder permissions allowing read, write, and execute permissions to the IUSR account, and the ASPNET account should have all permissions accept full control checked
- The database should have a database with a user that has dbowner permission, and this should be specified in the web.config (in AppSettings, and Connection Strings)
If all of those things are in place, there is no reason why your site shouldn't come up. :(