See if the last part helps:
Unable to open local files from Internet Explorer window?
http://windowsxp.mvps.org/ie/elevlocalfile.htm
Disable_Local_Machine_Navigate
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Ramesh, Microsoft MVP
Windows XP Shell/User
http://windowsxp.mvps.org
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Using ToolbarCop to remove the unwanted Toolband, Toolbar Icons and BHO:
http://windowsxp.mvps.org/toolbarcop.htm
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The Parasite Fight - Quick Fix Protocol:
http://aumha.org/a/quickfix.php
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Here, I make a more detail description of the web application.
Step 1.
Create a local folder;
Step 2.
Copy a .doc template to the new folder and rename it;
Step 3.
Open the document on the page(IE) using ActiveX object invocation, set
some values via javascript;
Before installing SP2, it works correct. After updated SP2, it dose not
work. So I think the problem should be:
A. Create local folder is not enabled anymore.
B. Some changes on invocation of ActiveX object.
I will try some tests these days.
Flybean