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On my PC, I had Reader 7.0 installed, then later installed Reader 4.0 (due to a pdf file which was only compatible with that version). In that configuration, I got the same behaviour you describe, regardless of any configuration settings in either version of Acrobat Reader.
The resolution for me was to uninstall Acrobat Reader 7.0, then reinstall it. For me, this required a reboot and reinstalling all the Reader patches (7.01, 7.02, 7.03)... Note: I would recommend starting Acrobat Reader manually and updating first before using it, as the update process can lock up IE and/or UR if the update dialog is displayed at startup...
I can't guarantee the same results for you, but that is the best support I can offer for an Adobe product <grin>!
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