Well, after hours of searching and trying different things, here is what I found.
To fix the problem with app.json 404 (Non Found) issue, I had to go into IIS and had to map the .json extension to the ASP.NET ISAPI DLL. That worked great.
Now that this works, the file is being called in and is getting a NETWORK_ERR: XMLHttpRequest Exception 101. This is due to in development.js in the mircoloader folder, there is an xhr XMLHttpRequest being called and even though everything is on the same domain, it is being treated as a cross-domain AJAX call, which is denied by browsers. I have read many things regarding this and the only thing to do is to put your xml in an iframe or make your site CORS (Cross Origin Resource Sharing). I can't do either. If I change development.js to testing.js or production.js which are in the microloader folder, neither work?
So, with that being said, and my head hurting like you wouldn't believe, I don't understand what to do to be able to test my mobile site on a testing server.
If anyone can shed some light, that would be great.