I have installed various versions of DNN before, but I'm installing DNN7 for the first time. I followed the same procedure - unzip the package, create virtual directory, grant full access to the apppool identity on the application directory, create a database, create a user, make user db_owner, and put the connectionstring accordingly in web.config.
"Server=(local)\SqlExpress;Database=dbname;uid=uid;pwd=pwd;"

Then I load my website, and see the install wizard. When I press continue on step 1, I get this error > ERROR: DotNetNuke requires SQL 2008 (express or full product) to work

 I doubt DNN7 does not support Sql Server 2012. The error message seems to be misleading. I also watched Chris Hammond's videos to make sure I am not missing anything. I'll appreciate any inputs on this one. Thanks.

ok, I figured it out with the help of our network admin. Turns out SQL Express 2008 was installed as part of the visual studio full install on this machine. This was somehow interfering with DNN trying to connect to the SQL Server 2012 instance. We uninstalled 2008 and all is fine now.