**** SOLVED MY PROBLEM ****
I never actually found a good tutorial on installing with SQL Server 2008 Express. 2005 yes but not 2008.
Well I was using the 2005 express connect string not really knowing what it was having never dealt with mssql servers before. (used mysql a little)
I found another post in these forums on how to get around the infinite redirct bug and decided I was going to try that instead of the version hack.
The post there had me modify the portal table in the database. I went to the database that I had created and found there was no portal table! Then I realized there were no tables at all! Just the default ones the server creates.
Turned out me and 1 divided by infinite wisdom had not realized that I was using the 2005 Express flat file and not the 2008 sql server solution.
2008 express is aparently as near as I can tell more like the real server and less like 2005 express. Atleast in the sense that it uses a real server as opposed to a flatfile. (Assuming I am even saying that right.)
So after some fiddling with my server information/logins etc. I was able to actually have DNN install to the sql server and not a flat file.
After running through the installation the portal opened up just fine with no version hack and I immidiately went into the host -> create definitions area and low and behold no FileIOPermissions error! W00T! :D
Thanks for all your help. God bless everyone. Back to hacking my way forward. :)
(Sorry for the double post if my other post ever shows up.)