This is kind of strange. It really seems this has nothing to do with us, although I noticed that something in our later installs seemed to change something.
1st thing -- with Outlook 2007, you will always be prompted. It seems they changed the behavior. See this post:
Outlook. AVOID PASSWORD PROMPT ON STARTUP
On Outlook, 2003 when I uninstalled and re-installed 5.0.11, I actually got the behavior you desired. Then I installed a later version of our connector, and the behavior changed.
But, I also tried with just an IMAP profile -- not using our code at all, and the behavior was similar -- it prompted whether the folder was expanded or not.
So I'm not exactly sure what is going on, but it appears that Microsoft wants the behavior where you are prompted every time -- that's why they changed it for Outlook 2007.
As for what we did that changed the Outlook 2003 behavior -- I am not sure. Possibly a registry key value.
What happens when you try an IMAP profile?