‘compilerVersion’ attribute in the provider options must be ‘v4.0’ or later

Getting this error:

The value for the 'compilerVersion'
attribute in the provider options must
be 'v4.0' or later if you are
compiling for version 4.0 or later of
the .NET Framework. To compile this
Web application for version 3.5 or
earlier of the .NET Framework, remove
the 'targetFramework' attribute from
the element of the
Web.config file.

It was working on our dev system, and we are now deploying to QA using an xcopy type deploy.

We don't have a "compilerVersion" anywhere in the web.config, and the targetFramework is set to "4.0". We have done an IISReset.

<system.web>

        <compilation debug="true" targetFramework="4.0">
        <assemblies>
            <add assembly="System.Data.Linq, Version=4.0.0.0, Culture=neutral, PublicKeyToken=B77A5C561934E089"/>
            <add assembly="System.Design, Version=4.0.0.0, Culture=neutral, PublicKeyToken=B03F5F7F11D50A3A"/>
            <add assembly="System.Web.Extensions.Design, Version=4.0.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
            <add assembly="System.Windows.Forms, Version=4.0.0.0, Culture=neutral, PublicKeyToken=B77A5C561934E089"/>
        </assemblies>
    </compilation>

UPDATE 2: when we removed the entire section, we got past the error. So my question is, what is wrong with leaving in this section if we are on .NET 4.0?

We just did a full xcopy of exactly what was in Test to QA, and in QA it gets the error and DEV doesn't. So the software and configs are identical. Why would it work on one server and not another? IIS options seem to be identical.