http://windowsxp.mvps.org/ie/elevlocalfile.htm

  Unable to open local files from Internet Explorer window? IE6 SP1 and
  later

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        Symptom

Problem opening up local files in a Internet Explorer window. For
example, the following code works on some systems and does not work in
some.

<a href="C:\Filename.TXT" target="_blank">Test</a>

*Explanation / Workaround*: from Eric Shen [MS]

    The issue is a new security feature in Internet Explore 6 Service
    Pack 1. In order to prevent Internet vicious codes from accessing
    your local files, the development team developed the new security
    feature and included it in IE6 SP1. Please be advised that this is a
    normal behavior. Actually, IE6 SP1 includes new security code checks
    that prevent "zone elevation". This means that documents located in
    the "Internet" zone will not be granted access (through HREFs,
    scripting...etc) to documents in the "My Computer" zone. Only
    documents located in the "Trusted" or "My Computer" zone can access
    documents in the "My Computer" zone. Therefore, if you want to allow
    untrusted documents to access documents in the "My Computer" zone,
    you might add the source URL in "Trusted sites" (this must be done
    with caution for obvious security reasons). The "Local Intranet"
    zone is trusted as well.

    Furthermore, the following registry key allows disabling the new
    security codes check that prevent "zone elevation": - You can create
    this DWORD key and set it zero to disable this new feature. Also,
    you can enable it by changing it to 1 at any time.

    HKCU\Software\Microsoft\Internet Explorer\Main

    Disable_Local_Machine_Navigate = 0 (REG_DWORD)

It is not recommended to use above registry key since it breaks the
"zone elevation" security fix. Please use this tweak only if you have a
valid reason to do so. The above is a per-user setting.


        (XP Service Pack 2) Local Machine restrictions prevents even the
        Trusted sites from opening files in My Computer Zone

In Windows XP Service Pack 2, *no* site from any Zone can open files in
local machine zone, whereas in pre-SP2, only Internet Zone sites were
restricted to open local files, while Trusted/Intranet can.

While the above method (Disable_Local_Machine_Navigate) works fine in
Windows XP Service Pack 2 also, here is more information and another
workaround for this issue:

Security Zone value * 2101* corresponds to *URLACTION_FEATURE_
ZONE_ELEVATION*
*Description:* Web sites in less privileged Web content zones can
navigate into this zone.

"Tweak" or alter the Lockdown Zone template itself:

Disabling this restriction still breaks the "Zone Elevation" security
fix. Use only for valid reasons.

Open Registry Editor and navigate to:

[HKCU\Software\Microsoft\Windows\CurrentVersion\Internet
Settings\Lockdown_Zones\0]

Backup the key to a REG file and in the right-pane, set the value *2101*
to *0*

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