I am posting this here as I hope it will save some time to someone. I wish I was able to google for solution myself. Anyway, there is new "feature" in IE8 that looks for javascript files included using relative hrefs in current folder even if BASE HREF is defined.

More info here (I posted there with nick gstnet):
http://social.msdn.microsoft.com/For...5-88b660f3e1ca

Response from IE developer here:
http://blogs.msdn.com/ieinternals/ar...ownloader.aspx

The wording in that blog pisses me off but at least they do admit there is something wrong. I would much prefer to see "we screwed up - sorry, sorry update has already shipped" but I am not gullible enough to expect that from Microsoft. Usually I hate seeing stuff like "micro$oft sucks" but I really hate them today.