Found out there are 2 possible solutions to solve this problem.
1) use CASPOL
caspol -m -ag 1.2 -url C:\PROJECTS\WEBAPPS\LogUploader\Library\* FullTrust
caspol -m -ag 1.2 -url c:\projects\webapps\loguploader\testcommon\bin\debug\* FullTrust
2) "unBlock" the dll -- this one worked
In Windows Explorer, view the properties of the file and click the unblock button in the General tab. I did this for the file in both locations and restarted the VS2K8 IDE and it worked.