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ArcReader cannot be opened using a custom template (.art) file after setting the shortcut to point to a specific custom template.
The default installation directory of ArcGIS is C:\Program Files\arcgis and does not allow for ArcReader to open with a specific template unless there double quotes are placed around the pathname.
Verify the target for the ArcReader shortcut appears similar to the example below if there are spaces in the directory containing the ArcReader.exe.
"C:\Program Files\ArcGIS\Bin\ArcReader.exe" /Loadsettings <template>