OK, this has been a strange journey. A week or so ago I ran into a problem with a smart client (1.1) I had created for a client. To recap, the problem was since I installed the 2.0 Framework (VS2005), when clicking on the link to launch the smart client, IE would bring up the File Download dialog. In other words, IEExec was not seeing that the exe was a smart client and thus not launching.
Well did some more testing and it is indeed 2.0 causing the problem. If I uninstall VS2005 and the 2.0 Framework, the 1.1 smart clients start working again, reinstall just the 2.0 framework, they no longer work.
As a further test, I tried to convert the smart client to 2.0 and use the ClickOnce technology (which is very slick by the way). This would be a better solution anyways and wouldn't take that much to convert the program to 2.0. Well converted it, published it to the web server and tried to launch by pointing a link to the .application file and the browser simply brings up the raw XML from that file. IE does not even try to launch the app.
I ran the 2.0 app from the command line using
rundll32.exe dfshim.dll,ShOpenVerbApplication http://www.malachicomputer.com/test/test.application
and everything ran fine....it is just as if the link between IE and the smart client technologies is broken when 2.0 is installed.
All very strange and it seems that some people are having simliar problems so I'm not alone, although I have yet to see anyone that has found a solution. So any insight anyone possesses would be greatly appreciated.