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When you mentioned it works with Notepad and not Setup.exe it rang a bell.
In windows 7 they have extra security checking on installers. So it might be to do with that.
Check this: http://msdn.microsoft.com/en-us/magazine/cc163486.aspx#S14
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For example, an executable would be marked as an installer if the executable name or description contained the strings "install" or "setup". So an application named setup.exe, without an application manifest, would trigger a UAC elevation if launched by a token without administrator privileges.
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To get around that you can try renaming setup.exe to something else. Or create a runas batch script to see if that is the cause.
Feedback response number WEBB87MDKH created by ~Rex Pretoolitoden on 07/23/2010