I am having the same issue as the original poster.
I followed the steps he outlined above and I am just getting "The System is restarting" message.
I opened the project in Visual Web Developer and attempted to run it from there but I get the same result.
I have verified that the DB connection string is correct and works. (tested it in a non-sitefinity app and verified I could connect.
This site works fine at my customer, but I cannot get it running locally so I can do any development.
Any assistance would be greatly appreciated.