I'm not a CAS guru, but I suspect this may be due to the change in .NET 3.5 SP1 that allows code from a network share to run as Full Trust.
Edit: Brad Abrams states that a recompile/target is not needed to take advantage of this. I'd assume it works the same in reverse - that targeting 2.0 will not get you the old behaivor, if you have 3.5 SP1 on your machine.
An existing application does not have to be recompiled or changed in any way to take advantage of this. Your current 2.0 Applications will just work, you don't have to target anything new in 3.5..
I suppose a fresh (VM) install with only the 2.0 FX may be able to root this out as the cause.