<p>I've a windows service that updates our product. It copies the product files into a temp directory, usually "C:\Windows\Temp", patches the binaries, and then uses MoveFileEx to copy the files back to the install directory on a reboot, usually "C:\Program Files\Product". The files in the install directory are inheriting their security attributes from the parent folder. After the copy, patch, and reboot, the files in the install directory are missing some ACLs. Specifically the files don't have the ACL for the Users group anymore so users can no longer run the program after the reboot.</p>

<p>Can anyone explain whats going on here? It seems that copying from the install directory to the temp directory, the files inherit the ACLs of the temp directory. On the MoveFileEx/Reboot, though, the files only inherit the ACLs that both the install and temp directories have in common.</p>

In Windows if you copy a file the file takes on the ACLs of the destination directory.  If you move a file the ACL goes with it overriding any it might inherit from that directory.  I'm not sure how MoveFileEx might operate differently on a file.
The temp directory is usually located under the user profile (both %TMP% and %TEMP% usually point here) so copying files here will have permissions for that user.  Moving those files to the program files directory will take only that users rights with them and therefore only runnable by the installing user.