Hi Onkar,
I had faced a similar issue in QTP with Vista, since QTP and LR are different tools I am not sure how much helpful this information will be:
1. Revert back from IE8 to IE7.
2. In IE7 disable tabbed browsing from internet options.
3. In Internet options of IE7, in security tab, uncheck "Enable Protected Mode" checkbox.
and try,maybe it will work.
Also disable UAC in user accounts otherwise select the icon to start LR and right click to select run as administrator.
Lastly using a higher version of LR is definitely recommended, I did not even know that a version below 8 existed

so you know what I mean.