Ah, I just dug through some posts (see : http://forums.microsoft.com/MSDN/ShowPost.aspx?PostID=283827&SiteID=1) and found my problem.

It seems restoring from a backup requires read permissions on the .bak file. And since...

Thanks for the replies! 🙂

The query based restore doesn't work either. I get the following error.

Msg 3201, Level 16, State 2, Line 1

Cannot open backup device 'c:\demo.bak'. Operating system error...