The scenario I am facing is that I have an ASP.NET web service (.NET 3.5) running on an W2k3 server which is using the CacheManager/IsolatedStorage store to store a persiste
I had this issue but creating "C:\Documents and Settings\Default User\Local Settings\Application Data\IsolatedStorage" did not resolve the problem because at some point there was a profile name change. The actual location for this server was "C:\Documents and Settings\Default User.WINDOWS\Local Settings\Application Data\IsolatedStorage".
If that does not work, I used Process Monitor with a filter for "IsolatedStorage" to find the correct path for the access denied error.