Had the same problem and I think it was because I wasn't careful with my web.config and the machine key, install date inside of it. I ended up finding a sure fire way to get this to work for me. Here is my process, hope it helps. I am assuming you are using Windows XP/IIS/SQL Server. Basically we need to start over...
1. Download the INSTALL package for DNN.
2. Create a new database. Give an SQL user access to it.
3. Create a new folder on your machine, naming whatever you want your site to be named.
4. Give the ASPNET account Modify permissions on this folder.
5. Extract the DNN INSTALL zip into the new folder you created.
6. Go to IIS and create a Virutal Directory. Point it to the folder you created above. Under the ASP tab, make sure the version is for 2.0.
7. Open VS2005. OPEN (not create) a website, which is the one you just created in IIS.
8. Website should open. I would at this point make a copy of your web.config, just for good measure.
9. Open your web config. Configure the sql connection to whatever you use.
10. SAVE the project, but do not build it.
11. Open up IE. type in this address (at least this was mine. substitute as needed): http://localhost/website/install.aspx/?mode=Install
12. This should run the install process and you should have been successful. If you get an error at the end of this that says create/shadowcopy error, go back to VS2005 project, click on web.config, it will ask you to accept changes, click yes to all, then build the project (ctrl-f5). that should fix it.
Hope this helps some. I am off on vacation so I wont be able to reply...good luck.