Jake-
A KB article is coming out shortly about this issue. However, here's the short version:
This error is occurring because of an unforeseen dependency between an IE6 XPSP2 security feature (Local Machine Zone Lockdown) and a new IE7 security feature designed to protect users from improper cross-domain access to their local file system. Until the dependency is corrected, users may correct the problem through one of two possible workarounds (below).
Workaround:
Two options are available¡ªeach option has a potential side-effect. The first option is to opt-in the 3rd party application into the Local Machine Zone Lockdown feature control key. This is the recommended option. It allows the 3rd party application experiencing the problem to be more secure by tightening restrictions on several URL actions that make the local file system zone more protected than the Internet Zone (this has potential compatibility implications). Users should read Compatibility in IE6 for Windows XP SP2 under the section Local Machine Zone Lockdown, for more information.
To opt-in to Local Machine Zone Lockdown:
1. Click ¡°Start¡±, ¡°Run¡±.
2. Enter ¡°regedit¡±
3. Find and select the following registry entry:
HKEY_LOCAL_MACHINE
SOFTWARE
Microsoft
Internet Explorer
MAIN
FeatureControl
FEATURE_LOCALMACHINE_LOCKDOWN
4. Click ¡°Edit¡±, ¡°New¡±, and ¡°DWORD¡±
5. The name should be set to the process name of the application experiencing the problem. For example, if the application is mybrowser.exe, then enter ¡°mybrowser.exe¡± (without the quotes)
6. The Value (double-click on the newly created entry) should be set to ¡°1¡± (this opts the process into this feature, enabling the workaround)
7. Close the Registry Editor
8. Close all open instances of the affected process (and IE) and restart the program.
The second option is to opt-out of the new cross-domain protection feature (which blocks access to scripts on the local file system). Opting your application out of this feature leaves it vulnerable to web sites that may scan your computer looking for script files or other information. If your application is designed to host arbitrary content, this option is not recommended.
To opt-out of the cross-domain protection feature:
1. Click ¡°Start¡±, ¡°Run¡±.
2. Enter ¡°regedit¡±
3. Find and select the following registry entry:
HKEY_LOCAL_MACHINE
SOFTWARE
Microsoft
Internet Explorer
MAIN
FeatureControl
4. Click ¡°Edit¡±, ¡°New¡±, and ¡°Key¡±
5. Enter FEATURE_BLOCK_LMZ_SCRIPT
6. Next, click ¡°Edit¡±, ¡°New¡±, and ¡°DWORD¡±
7. The name should be set to the process name of the application experiencing the problem. For example, if the application is mybrowser.exe, then enter ¡°mybrowser.exe¡± (without the quotes)
8. The Value (double-click on the newly created entry) should be set to ¡°0¡± (this opts the process out of this feature, enabling the workaround)
9. Close the Registry Editor
10. Close all open instances of the affected process (and IE) and restart the program.