The error message is kinda strange. I have not seen something like this, however, I wonder if the user account is unable to create the folders. It could be as simple as a permissions error, or it could be that the "Temporary ASP.NET Files" folder doesn't exist and it cannot create the sub directories under that.
So two things I would try would be.
1. Check that c:\windows\Microsoft.NET\Framework\v2.0.50727\Temporary ASP.NET Files\reports folder exists
2. Check that the service account that you are running the report site under has permissions to c:\windows\Microsoft.NET\Framework\v2.0.50727\Temporary ASP.NET Files folder.
Bruce Taimana - SDET TFS Server Team | 
index > Team Foundation Server - Reporting > Error 28806. Something is wrong with Reporting Services