I'm not sure about the prompt when opening Outlook, but it sounds like the View settings are stuck, preventing the change in the reading pane. Usually running the /cleanviews command switch will fix this. To run the command switch, type the following in the Search programs and files box in the start menu:

Outlook /cleanviews

This command will clear all custom views and reset it back to default. Once this has been done, try changing the reading view and see if it sticks.

Hope this helps.

-SW