Error while hosting .NET 1.1 application on IIS7

I am hosting a .NET 1.1 application on IIS7 while browsing my application i am getting an error in application event logs.

Failed to execute request because the App-Domain could not be created. Error: 0x80131522

Event ID : 1088

Source : ASP.NET 2.0.50727.0

I'm running windows server 2008 Enterprise. I don't know why error is thown from .NET 2.0 while application is hosted on .NET 1.1.