Just got it solved.I actually thought the same way you did and followed the permissions/security path. Lots of dead-ends and no solutions through that route.
The problem was that the web app got mapped to the 2.0 framework...it was written for the 1.1 framework. How that happened is still a deep, deep mystery. I ran the following script from the proper framework folder on the server:
aspnet_regiis -s W3SVC/1/ROOT/MyAppName
That cleared everything up. It remapped my server scripts to the proper framework.
Thanks a lot for responding!!
Bill