John,

you usually do not need to edit web site manually any longer, this will be executed by the installation wizard. Make sure, you unzipped DNN isntall pacakge properly to a directory, create a and configure a Web site in IIS pointing to it (adjust security, default document and ASP.Net 2.0) and make sure, the SQL Server grants permission to local "Network Service" account (integrated security) or SQL security has been enabled to use a SQL server account you need to create first.

If you want to use a file based acces using /app_data/Database.mdf you must be aware, that you cannot access it using Database Management Studio Express, see S. Shaun Mehaffie's blog for details. I always prefer classic database, i.e. I manually create a database in DB Management Studio Express and grant DBO full permission to the specified user (with schema dbo).

Now browse to the site using the external address and the wizard shall show up. if it doesn't, please post the error message here. 

Right, you do not need to adopt it manually.

I suggest to delete and recreate the database and start with default web.config again. Make sure, full file system permissions are granted for all extracted files to "Network Service" account.