I'm having the exact same problem-- stuck in Microsoft Reader hell.
First, I bought an encrypted eBook that required Reader. Hey, no problem: I downloaded and installed Reader on my XP box and 4700, then learned about activation.
Whoops! Can't activate with FireFox-- you have to use Explorer. But every time I tried to activate, I was told that activation failed, and that I should log in as Administrator or some other user with admin privileges.
Took me a while to figure out that Service Pack 2 for XP had kindly disabled most ActiveX control functions-- not even allowing the system to prompt you for them-- and that I had to disable these so that I could install the special ActiveX control needed to activate Reader.
Did that, activated Reader on my XP box, but when I clicked the button to activate it on the iPaq, I got the same message you did.
I tried reading the book on the iPaq anyway. Reader puts up a helpful prompt:
"The digital security software that protects this eBook has been updated. Yoiu must re-activate in order to open this title. Please go to
www.microsoft.com/rea... for additional information."
I tried completing the URL, assuming that "rea..." would complete to "reader", but no dice, so I'm stuck.