QWERTYtech,
This post has become so fragmented with bits of information that it is almost non relevant information at this point. If you want to start from scratch, let's do this:
Do you have Visual Web developer or Visual Studio? I'm only asking because I want to give you precise instructions. If you don't have either, download VWD Express - it's free and you will need an application such as this to continue to develop your site. Might at well get your feet wet now although you do not need this to do the install.
When you installed SQL Express, did you choose Windows Authentication or SA? This will make a difference in your web.config. In other words, if you set SQL Express up for windows authentication, you will not need to make any changes to the default web.config file.
I just got through on my Windows 2003 Server setting up 4.6.2 in under 5 minutes so follow these instructions exactly and you should have success. And for now...forget completely about host header records, dns, app pools, extensions, etc. The first goal is to get a localhost version of dnn installed at this point.
1) Create a folder on your drive and unzip the 4.6.2 install package there.
2. Delete the web.config and rename the release.config to web.config.
3) Right-click on the folder and go to properties and add the NETWORK SERVICE account and give it full permissions.
This is all that needs to be done to the folder or directory. So now it's time to set up IIS for a basic localhost, virtual directory install. DNN is also easy to set up as a stand alone website in IIS but for now the goal is to simplify the installation.
4) Right-click on the default website > choose new virtual directory > give it an alias of QWERTYtech and make sure to check read and run scripts. Click finish.
5) Right-click on the new virtual directory (QWERTYtech) and go to properties > documents > add the default.aspx page if it is not there and move it to the top of the list.
6) By default...you should not have to make any changes to things like the app pool, ASP.NET version (it should default to 2.0).
To get the site through the install:
7) Open up a broser and type in http://localhost/QWERTYtech/Install/Install.aspx and the installation wizard will come up and you can follow the prompts from there.
8) With VWD, open the website, go to view and choose > show output > press Ctl + F5 and the application should build and launch the installtion wizard.
If this doesn't work, then next we will do pictures. If that doesn't work, we'll do video. If that doesn't work, I'll come over and install it for you 
. Don't give up!
Hope this helps.
Paul