I converted an old console app from .NET Framework 1.1 to 2.0 using Visual Studio 2008. When I ran it I got the following helpful error message

This application has failed to start because the application configuration is incorrect. Reinstalling the application may fix this problem.

Looking in the Security Event Log I found the following messages:

Generate Activation Context failed for C:\ParsII\bin\server\CCSWinService2.exe. Reference error message: The operation completed successfully.

Syntax error in manifest or policy file “C:\ParsII\bin\server\CCSWinService2.exe.Config” on line 1.

The last one was the key. In the app config file the first line was

<?xml version="1.0" encoding="Windows-1252"?>


That should be perfectly legal for an XML file, but deleting it caused everything to work perfectly.