Just to bring some closure to this.. The issue seemed to be similar to the one posted in this thread: http://www.sqlservercentral.com/Forums/Topic1262389-391-4.aspx
However, the solution to that issue (caspol.exe -machine –reset) did not work for me. It turns out the problem was with the Security.config file for .NET. Based on the post from MS at http://blogs.msdn.com/b/shawnfa/archive/2004/10/21/245972.aspx, I deleted those files from the locations listed in that post. Still didn't work for me. It turns out, this file is stored in another place not mentioned in the previous website - it was in my C:\Users\<username>\AppData\Roaming directory.
Bottom line, I searched my entire hard drive for all copies of Security.config and Security.cch and deleted them all. That allowed the SP2 program to run.