Blocking Local file access from a Local Internet site

I have a web application that uses an activeX to download some files to the
local machine (basically to cache some large XML, HTML and js files). It
then provides a link to launch those download files something like:

file:///c:/temp/cache/test.htm

Prior to installing Service Pack 2 this worked fine. I have been trying to
find a setting to allows this in SP2 world and have not come up with
anything. I have verified the original site is coming up as Local Intranet,
and I also tried Trusted site. Since it launches the local files in another
browser window I also verified pop-ups were allowed (even turned them off),
and still the link does not work. It changes the cursor like it recognizes
the link, but clicking does nothing.

Thanks for any help anyone can provide!