Rick the original guy here.
I have spent a couple hours on this problem today and I don't have an answer yet. But here's what I do know.
These sites are using the exact same cute5 files, and a few more things exactly the same, like global.asa, error404 file, setting the 404 error in IIS as outlined in my original message.
These sites are also on the same server, running Windows 2003 SBS with IIS 6.0 etc. fully updated with Windows Update.
Thanks to the community for trying to sort this out. We're not there yet.
..Rick..