Well as I alluded to in a few previous posts, I was running into issues with my 1.1 No-Touch Deployment smart clients I developed for a client of mine that ran across the internet. Well I've finally found something official from Microsoft in regards to this issue.
Bug Details: .NET Framework 2.0 breaks No-Touch Depoyment (HREF exe) apps from the Internet
There are a few workaround's posted which you may get varying mileage out of. I in fact took the third suggestion when I converted them to 2.0. This actually worked out pretty well and from the looks of things, this was really the only good solution that worked in our situation.
This should be considered pretty critical as it breaks existing code which can cause great problems. In our case, it was easy enough to convert them to ClickOnce apps which enabled us to take advantage of some other enhancements, but for others this may not be so simple or feasible. Non of the other solutions look appealing either at least for our application.