I google'd a lot on this and discovered corruption (bad entries) in the dnn files and folders tables. After purging and re-syncronizing the DNN file manager the exception error went away (and after updating the folder permissions table).
But.... the reason I was looking into this hasn't gone away. When a user with view, edit, and add permissions adds a new folder or file to the DMX repository the new folder does not allow the user to add items to the folder; the right click or folder menu does not show the "New Item" option, or any option that would allow changes to the folder. After logging out of DNN and/or after waiting for some time (maybe 30+ minutes) the menu items appear.
My next test in the morning will be to observe the DMX_EntryPermissions table to make sure the correct permissions are added, but since after waiting some time the user can access the "New Item" menu option, the permissions are probably entered.
I'm running DNN 4.08.04 and DMX 5.00.02. I was going to upgrade to DMX 5.00.05 to see if that made a difference. Also, I am running ASP.NET 2.0.50727 (I was thinking it might be an ajax problem since a screen refresh sometimes works).
Might there be an indexing problem; given it take some time to retrieve the correct permissions?
Thanks again,
Rob