Designer is not able to invoke password-protected web services.
LiveCycle processes are password protected by default.
Try turning off security on the process you're calling.
You will also need to turn security off on all the components that you are using within your process. We have a solution in beta testing that allows you to work around this restriction. Please email email@example.com if you would like to receive a copy of this.
Another possible reason is that you are behind an NTLM authenticating proxy and don't have the "Display PDF in browser" option selected. This type of authentication is used by Microsoft ISA proxies (and probably a few others).
The following describes how a web browser makes a connection to a web site behind a NTLM proxy:
1) Request for the resource sent to the proxy.
2) Proxy replies with "407 Proxy Authentication Required" and a challenge.
3) Browser gets the required proxy credentials (usually the current Windows credentials) and hashes them with the challenge.
4) Browser re-requests the resource, this time with the hashed response in the header "Authorization".
5) Once the proxy verifies the credentials, it then forwards the request on to the actual resource.
Unfortunately Adobe Reader thinks that the "407 Proxy Authentication Required" is the actual response from the resource and tries to process it (which will fail with "Error attempting to read from file"). I can prove this is what was happening by looking at an Ethereal dump of the communication from Adobe Reader. I have explained the problem to a couple of Adobe people and they both think that this issue will not be resolved (in the near future anyway - see http://forms.stefcameron.com/2007/05/21/connecting-to-a-web-service/#comment-2970)
We had to abandon a project (a fair way into it too) that made use use of a Reader Extended interactive PDF that would submit all of it's data once completed because of this reason.
Thankfully along came Form Guides! Because Form Guides use the Flash Player which in turn uses the browser's connection (which must have already completed the NTLM authentication before it downloads that .swf).