I'm trying to install a new instance of DNN on our server for a new client, and I'm getting the same error.  I'm (sort of) glad to know I'm not alone, but if anyone knows what this is or what to do about it, it would be really helpful.

I finally got it too work. For me I had to install using the third option, "Automatic". This worked but doesn't allow you to specify any custom setting.

Okay, I got the same thing too and was getting pretty p****d off after the good things I'd heard about DNN.  I got the install to work, but the thing that did the trick was really subtle ... maybe it will work for you guys too.  I cannot recall seeing anything in the installation guides that say anything about using "Integrated Windows Security" or "Mixed Security" modes in SQL server. 

When I first tried, I created the database (default collation settings) and set the connection string in web.config with a named user and password.  This all checked out okay when I did a "test connection" on the install page.  However, when CHECKED the "Use Integrated Windows Authentication" checkbox, the connection attempt failed for user [HOSTNAME]\ASPNET.

I then added [HOSTNAME]\ASPNET as a server login and also as a db_owner for the database and tried the connection test again, and it worked (as expected).  What I didn't expect though was that THE INSTALLATION WORKED PERFECTLY AFTER DOING THAT.  It seems to me that you need to set [HOSTNAME]\ASPNET specifically as a db_owner.  I