How do I get audio CD to open in iTunes for ripping?
Can you use Expose to show all of the windows running? Have you tried with different CDs, to make sure it isn't one of those CDs that has an application on that just plays the music.

I've just tested with the same settings as you (System preferences - Music CD, open iTunes and iTunes, Ask to import) and all it did was open iTunes.

Another possibility, have you got any other media player applications running?