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I have a WSE2 web service that was working fine until one day i got the above error. i realised i had changed the permissions on the folder (for the web application), so that only System, Adminstrators and ASPNET had permissions on it. Previously the 'Users' group had permissions. By a process of elimination, i found out that IUSR_xx needed to have read/execute permissions aswell as ASPNET, even though the process is running with the identity of ASPNET.
it's strange, but i thought i'd post my solution here in case anyone else comes across this.
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