Really? I can't get an answer from anyone at Adobe on this one? Does this not appear to be an issue for other organizations with security concerns?
This is the expected behavior for Reader X, it's somewhat unexpected, so let me explain the rationale behind it:
With Reader X, Adobe introduced the concept of sandbox - this mechanism severly curtails the rights provided to the Reader process to prevent exploits from running. In your case, Reader process cannot write to user's disk without users' explicit approval. The Save as dialog that you see is seeking that approval. Certain folders such as the TEMP folder are white listed, you should see if you can incorporate those into your workflows.
You can find details here:
Open up Adobe Reader
In the edit menu -> preferences
In the Security (Enhanced) -> Add Folder Path button
Select drive/path where you want to save the PDFs and press OK
This will allow you to whitelist directories which you want to use!