I opened Michael Schwarz's AjaxPro solution in Visual Studio 2005 and I was greeted with this:
As you can see, this is running from the C: drive on my local development machine. Guessing that this problem might be related to the fact that I added my local machine to IE's list of trusted sites, I removed that setting. Unfortunately, the dialog persisted.
Next I added a new code group to my LocalIntranet_Zone and gave full trust to the URL "file://C:\*". Even that didn't resolve the issue. My next step was to open all the csproj files and the sln file for the solution and look for anything that might trigger this dialog. I deleted all the TFS source code control settings (I don't use CodePlex), but that didn't help.