One thing looking at the error, is that you are using a directory other than your root directory (dnn.).
Make sure that directory ALSO has ASP.NET 2.0 set up. Looking at the error, I don't think that is the issue, but it would not surprise me.
I made sure 2.0 was set for the subdomain, and I have moved past the first error, now I am on to db script installation errors... grrr, I remember when my php cms sites were giving me this trouble before I understood them too.