Logon failure when calling a wcf service that calls Directory.GetFiles to a share drive on network

I've been stumped for the last two days on the following:

I have an app on local machine that calls a method in a wcf service on the network that tries to get the files on yet another network share drive. I get >> Logon failure: unknown user name or bad password.

The service is installed on IIS.

What I notice is that the user logging on to the share drive is myLocalMachine\ASPNET, which is clearly not a domain user.

I have tried a number of things including:

1-- <authentication mode="Windows" />
<identity impersonate="true" userName="mydomain\validUser" password="pw"/>
in the service's web.config.

2-- Tried adding
<serviceAuthorization impersonateCallerForAllOperations="true" />
in service's web.config, and:
[OperationBehavior(Impersonation = ImpersonationOption.Allowed)]
to every method of my service class ( also tried ImpersonationOption.Required)

3-- Besides using the automatically configured default service reference, I tried playing with
          <identity>
            <dns value="mydomain\validUser"/>
          </identity>
on service and
    <identity>
        <userPrincipalName value="mydomain\validUser" />
    </identity>
in calling app, although I understand this is not meant for this purpose, so I didn't expect it to help.

I've played with some IIS settings to no avail.
Setting impersonation on the calling app also makes no difference.

Can anyone please point me in the right direction?

Thanks!