Let me answer my own question. .Net 2.0 doesn't run on Win 7 anyway. So maybe IRSTM was trying to fall back to any version it could find. Given that theory I remembered I turned off .NET 3.5.1 like you can do from the control panel "Turn Windows Features On or Off". Once I turned .NET 3.5.1 back on IRSTM worked, a shaft of light broke thru the clouds, and I heard a voice saying something like "blah, blah, blah... well pleased."
Perhaps repairing Microsoft*.NET framework from Programs and Features would have helped but it is good you got it working anyway.