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>with an "-edited-1" suffix added to the file name (still in CR2 format)
If the file is open in Photoshop it is no longer an actual CR2 file (the extension in the window is only an indicator that's where it came from). Once open in Photoshop the actual file format is unspecified because the file has not yet been saved. But, it HAS been processed (otherwise it wouldn't be open in Photoshop since Photoshop on its own can't read a raw file without Camera Raw).
Net/net, don't worry about it, it's working as expected (and yes, things change as it did between Elements 5-7).
Yes, the picture clearly has been processed - just not by me! In PSE5, choosing EDIT IN PHOTOSHOP would hand off the RAW image to ACR, which allowed me to do ACR-specific stuff PRIOR to opening the picture in CS3. This is now gone. This is exactly how it works currently in PSE7 for "FULL EDIT". ACR grabs the RAW file, then, clicking on OPEN IMAGE hands off the ACR-modded RAW file to the PSE7 Full editor.
Net: PSE7-->ACR-->PSE7 FULL EDITOR works, why can't PSE7-->ACR-->CS3 (like it used to) for RAW files?
I am seeing the same thing you are. It seems that this is new to Photoshop Elements 7 Organizer. All raw files (I have confirmed with .CRW, .CR2, and .NEF} open in Photoshop CS3 with no opportunity to adjust any of the camera raw options. I would assume that the raw file is being processed with some default setting and immediately opening in Photoshop CS3.
If I ask the Photoshop Elements Organizer to do a 'Full Edit' in the Photoshop Elements 7 Editor the Camera Raw window does open.
I would also like to learn how to restore this function.
I reread your post, sorry I should have grasped your last sentence before my earlier post.
I just want to make certain, you are saying this is the now how it should be working now in PSE 7?
If this is definately so, I have other ways to work around this, and will ask those questions in the Photoshop Elements section.