John,
AE is a webpage. When you start it within outlook, it's actually starting an IE session and just displaying it in the outlook window. The setting I think you're referencing tells the client to open a new page for AE when it starts (effectively causeing it to start outside of outlook), or spawn a page within outlook. Gotta love MS's *cough* interoperability. :)
Anyhow, hope that makes AE make more sense.
micah