aha! I stumbled upon this post:
ktimby was having issues with blogengine.net being a subfolder of a root application where that app's web.config was interfering in some way with blogengine.net.
I'm in a similar situation. blogengine is installed in /blog which is a app folder inside of a .net 1.1 root application.
After some trial and error, the culprit is that I've set up forms authentication in the root application:
So, that leaves the question: What (if anything?) can I do to not have this web.config interfere with blogengine.net?