>>But I think the compression problem is the more likely culprit (between these two)
>
>I can disable the compression.
>
>But, as additional information, we do not have that in our UAT environment. This is the same virtual environment except a test server. It does however have less traffic. Knowing that, do you still believe this is a compression issue or that could be related to a local setting specific to the server or to the production line of servers sitting in that virtual environment?

I don't know. In your original post you mentioned that another application in the same environment also experienced problems so that might well point to a NAS related issue. OTOH the event log entries for the caching problem shows that the compression error relates to the local c: drive. Also it implies that the problem is not fatal - just that compression is being disabled.

It might be worth temporarily disabling the web-garden (i.e. setting 'Maximum Worker Process' to 1) and see if the problem still occurs.

Don't know if this can help (never used it) : http://www.iis.net/downloads/community/2009/11/aspnet-debugger-extension-for-iis-7

You could try turning on event logging for more recycle related events (in the 'Generate Recycle Event Log Entry' section) but it may not help.
Also log application start events in ASP.NET to see if it gets that far (and make sure any exception there gets logged)

Don't know what else to suggest since it's not really my subject :-{