I have the same problem if I add a new database.  If I leave the web.config alone and use the existing database I get an Application error if I do a custom install.

Try changing your timeout limit in web.config to something crazy long like this:

<httpRuntime useFullyQualifiedRedirectUrl="true" maxRequestLength="18192" requestLengthDiskThreshold="18192" executionTimeout="790" />

I had a very similar problem upgrading a large DNN install and this did the trick. Of course I banged my head against wall for weeks until I figured it out. Since DNN has horrible install instructions and troubleshooting documentation we have to go through these trials. The knowldege is out there but impossible to find out who has what!

is it a matter of deleting all source files to uninstall DNN?

thx,

riz