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Argh, for hours I have been working on this!!
I found out that with DEP (Data Execution enabled) in windows XP SP2, I would click on the launcher, get an hourglass, then nothing would happen. Once I disabled DEP, it started working again.
Right click on "My computer" > properties > advanced > performance options > data execution prevention > set to "turn on DEP for essential windows programs and services only
Hope this can help someone