Cannot click HTTP links in Office 2003 w/ IE8

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Hello,
I am currently running the following:

Windows XP SP3 + post
Office 2003 SP3 + post
IE 6/8
GPO - Run Only Allowed Applications


Okay, here is my situation and I will try to be as clear as possible.

I am updating some systems from IE6 to IE8 but after the install of IE8 I lose the ability to click http links in Office 2003.
Now, IE8 can launch directly with no problem (as specified by my "run only allowed applications" GPO) and I can call upon IE8 through Office (Word) by clicking links in the "Other Task Panes" section (news about office, online help, etc). Office WILL launch IE8.

If I open a Word document with a link or an email with a link I get the following error - "This operation has been canceled due to restrictions on this computer. Please contact your system administrator".

Now, I HAVE done the following:
KB 310049 - please DO NOT refer me to this
Set program access in Control Panel
I have replaced the registry key HKEY_Local_Machine\Software\Classes\htmlfile\shell \open\command
I have confirmed the associations in the registry for .html, .htm, .shtml - IE6 and IE8 are the only browsers EVER to be installed. No FF or Chrome or Opera
I have reinstalled Office
I have gone through both the IE8 and Office 2003 ADM's multiple times


I have removed the IE8 and Office 2003 ADM's
I have ran Procmon to see if something else is called - nothing
I have Not Configured the "DO NOT run these applications" in case there is a conflict with the 5-6 programs that shouldn't be ran.

There are only 2 ways that I can get IE8 to launch when a http link is clicked in Office:
1. NOT CONFIGURE "Run only allowed applications" --- YES "iexplore.exe" is listed in the allowed applications
2. right click Word/Outlook, run-as Administrator


If I uninstall IE8 and it rolls back to IE6, everything is fine.

Help is GREATLY appreciated as I have been working on this for the past 2 days and I am going crazy here.