UPDATE: See if this webpage of MVP Mike Burgess' addresses the problem:
http://mvps.org/winhelp2002/hostsfaq.htm#message
--
~PA Bear

PA Bear wrote:
> See 'Known issues with this security update > Controls that prompt before
> they are loaded' section of http://support.microsoft.com/kb/931768
>
> 1. Try opening IE in No Add-ons mode & see if this behavior persists. If
> it
> doesn't, change your IE home page to "blank" then close IE7 and reopen
> normally (i.e., with all Add-ons enabled) and see if the behavior returns.
>
> 2. If still no joy, reopen in No Add-ons mode, reset IE settings
> (http://support.microsoft.com/kb/923737), close IE, open normally and see
> if
> the behavior still persists.
>
> This is all related to a cross-site security vulnerability addressed by
> MS07-027/KB931768: http://secunia.com/advisories/24535/
>
> Also try this fix, courtesy of MVP Robert Aldwinckle:
>
> Start > Run > Type or copy/paste the following into the box:
>
> iexplore.exe -nohome -extoff
>
> [Note the spaces in the line above!]
>
> tony wrote:
>> I have been running Internet Explorer 7.0 on Windows Vista for several
>> months and it was working fine. But today I just installed the "Security
>> Update for Windows Internet Explorer 7 (KB931768)" and that caused IE7 to
>> stop working.
>>
>> After I installed the update and restarted Windows, IE7 will no longer
>> start. Now when I double-click the icon or run iexplore.exe, the web
>> browser
>> window flashes quickly on the screen and then disappears. Then this error
>> message dialog box appears.
>>
>> ----------------------------------------------------------------------
>> File Download - Security Warning
>> Do you want to save this file?
>> Name: navcancl
>> Type: Unknown File Type, 2.64KB
>> From: ieframe.dll
>> Save Cancel
>> ----------------------------------------------------------------------
>>
>> temporarily, I have three ways to fix it:
>> 1. retore Vista or uninstall the patch
>> 2. run IE as Administrator ( which, as a matter of fact, disable the
>> protection mode)
>> 3. in IE Options->Securities->disable Protection Mode.