My questions are:
1. Do I create a MySQL Database with "phpmyadmin"
2. What will be my "hostname" - is this my Server Name
3. The Database username and password will be what? root and root password?
ad 1. That would probably be the best alternative, but perhaps it is easier to follow the
SME Server shell instructions in the wiki. It instructs you how to create the database as well as configure a username and password for your application.
ad 2. This will most likely be the host where the database server is running. If that is the case it should most likely be localhost. If it is the outside location where your first page of the web application is located it might be the URL at which it can be reached (I guess it is the database server and hence 'localhost' in your case).
ad 3. The answer is in my first point, but I can explain a bit more. The root user is for administration only and is set up to be more secure than on normal configurations as the root password is supplied to the user by a special mechanism, which makes it possible to use a highly encrypted and secure password as you do not need to type it yourself, when accessing mysql from the SME Server shell.
You should never run applications as root user, you should always create a user with the proper privileges to the proper database(s) on your server (which you do in step 1). The username and password you should supply are the ones you entered in step 1.