From this bit of your original post "I have verified the login by logging on to a machine as the user opening sql2005 & opening the database with no errors." it's clear that you're trying to enter domain account details into the DNN install - this won't work, but I think you already know that .

It's probably easiest to use a SQL Login for DNN, the following SQL script will create one for you if there isn't one available;

USE [master]
GO
CREATE LOGIN [DNNUser] WITH PASSWORD=N'SomeSafePassword', DEFAULT_DATABASE=[master], CHECK_EXPIRATION=OFF, CHECK_POLICY=OFF
GO
USE [MyDNNDatabase]
GO
CREATE USER [DNNUser] FOR LOGIN [DNNUser]
GO
USE [MyDNNDatabase]
GO
EXEC sp_addrolemember N'db_owner', N'DNNUser'
GO
Change the various names as appropriate, then use the login name and password as your DNN database login details. Using this login the DNN app will have full access to the database (but not the database server) so, from a security perspective, if your DNN is compromoised, so is your database.

It's also worth bearing in mind that sometimes 'login failed' can mean other things like  'Couldn't find server' or 'Couldn't read connection string'  - just make sure you double check everything