I know I'm doing something wrong since I've read that many people have done this already, but I can't figure it out.

I downloaded the _upgrade package from Codeplex.

I copied what I downloaded over the existing sub directories

I made the changes to the web.config (SQL Connection, code sub directory, install date and machine keys)

But when I go back to the site, it starts a new install and not an upgrade.

What am I doing wrong? Oh, and if I let the new install go, it will ask me for all the new information such as user names and the likes. If I enter the same information as before it tells me it already exists.

Thanks in advance.

 do NOT touch web.config manually. you might have used a different databaseowner or objectqualifier in SQLdataprovier section.

You should have made a backup of the old site but also renamed the web.config to something like old_web.config.  Pull the connection strings, machine keys, and the installation date from old to release.config and rename it web.config.  I would also recommend taking a look at object qualifiers.  If you don't have a real compelling reason to use them, I would stay away and just keep it simple. 

This is kind of the abridged version of how to do a DNN upgrade but I think you're close.  Give it another shot, I think you're on the right track.