Thanks for the quick response.

1. Tried granting ASPNET read/write permissions on %SYSTEM%/Microsoft.NET and it didn't work.
2. If this solution did work, our network administrators would never allow it as it is a major security hole.
3. ASP.NET 1.1 never needed to grant permissions to %SYSTEM%/Microsoft.NET for Editor to work.
4. I am running ASP.NET 2.0 RC1 on a Windows 2003 Server Virtual Machine for my testing.
5. I tried granting read/write permissions to NETWORK SERVICES user instead on both %SYSTEM%/Microsoft.NET and the project's /bin folder and it didn't work.

All produced the same error as before.

Any other suggestions?