ASP.Net error: "The identity of application pool is invalid"

Have you enabled "Log on as a service" for the account?

Start -> Control Panel -> Administrative Tools -> Local Security Policy -> Local Policies -> User Rights Assignment -> Log on as a service

(make sure your account is in this list directly or indirectly; it has also been suggested that you should set: Access this computer from the network; Deny logon locally; Log on as a batch job)

Also - ensure that the account has "Read & Execute", "List Folder Contents" and "Read" access to the file system that underpins the web site/application.

Try running the following command in the C:\WINDOWS\Microsoft.NET\Framework\v2.0.50727 folder:

aspnet_regiis -ga <your_app_pool_user>

For more info on configuring a user account to use as an application pool identity see the following article:

How To: Create a Service Account for an ASP.NET 2.0 Application (MSDN)