setuptools auto-test not working

as per README.unittest documentation, tried to run python setup.py test, which fails as follows:
D:\Downloads\SQLAlchemy-0.6beta3>python setup.py test
running test
running egg_info
writing lib\SQLAlchemy.egg-info\PKG-INFO
writing top-level names to lib\SQLAlchemy.egg-info\top_level.txt
writing dependency_links to lib\SQLAlchemy.egg-info\dependency_links.txt
writing entry points to lib\SQLAlchemy.egg-info\entry_points.txt
reading manifest file 'lib\SQLAlchemy.egg-info\SOURCES.txt'
reading manifest template 'MANIFEST.in'
warning: no files found matching 'Makefile' under directory 'doc'
no previously-included directories found matching 'doc\build\output'
writing manifest file 'lib\SQLAlchemy.egg-info\SOURCES.txt'
running build_ext
c:\Python26\lib\site-packages\nose-0.11.3-py2.6.egg\nose\plugins\manager.py:385:
 RuntimeWarning: Unable to load plugin sqlalchemy = sqlalchemy.test.noseplugin:N
oseSQLAlchemy: cannot import name Alias
  RuntimeWarning)
Traceback (most recent call last):
  File "setup.py", line 133, in <module>
    **extra
  File "c:\Python26\lib\distutils\core.py", line 152, in setup
    dist.run_commands()
  File "c:\Python26\lib\distutils\dist.py", line 975, in run_commands
    self.run_command(cmd)
  File "c:\Python26\lib\distutils\dist.py", line 995, in run_command
    cmd_obj.run()
  File "c:\Python26\lib\site-packages\setuptools\command\test.py", line 121, in
run
    self.with_project_on_sys_path(self.run_tests)
  File "c:\Python26\lib\site-packages\setuptools\command\test.py", line 101, in
with_project_on_sys_path
    func()
  File "c:\Python26\lib\site-packages\setuptools\command\test.py", line 130, in
run_tests
    testLoader = loader_class()
  File "c:\Python26\lib\unittest.py", line 816, in __init__
    self.parseArgs(argv)
  File "c:\Python26\lib\unittest.py", line 843, in parseArgs
    self.createTests()
  File "c:\Python26\lib\unittest.py", line 849, in createTests
    self.module)
  File "c:\Python26\lib\unittest.py", line 613, in loadTestsFromNames
    suites = [module) for name in names](self.loadTestsFromName(name,)
  File "c:\Python26\lib\unittest.py", line 598, in loadTestsFromName
    test = obj()
  File "c:\Python26\lib\site-packages\nose-0.11.3-py2.6.egg\nose\core.py", line
310, in collector
    conf.configure(argv=['collector']('collector'))
  File "c:\Python26\lib\site-packages\nose-0.11.3-py2.6.egg\nose\config.py", lin
e 273, in configure
    options, args = self._parseArgs(argv, cfg_files)
  File "c:\Python26\lib\site-packages\nose-0.11.3-py2.6.egg\nose\config.py", lin
e 261, in _parseArgs
    return parser.parseArgsAndConfigFiles(argv[1:](1:), cfg_files)
  File "c:\Python26\lib\site-packages\nose-0.11.3-py2.6.egg\nose\config.py", lin
e 132, in parseArgsAndConfigFiles
    self._applyConfigurationToValues(self._parser, config, values)
  File "c:\Python26\lib\site-packages\nose-0.11.3-py2.6.egg\nose\config.py", lin
e 118, in _applyConfigurationToValues
    name=name, filename=filename)
  File "c:\Python26\lib\site-packages\nose-0.11.3-py2.6.egg\nose\config.py", lin
e 258, in warn_sometimes
    raise ConfigError(msg)
nose.config.ConfigError: Error reading config file 'setup.cfg': no such option 'with-sqlalchemy'
nose is definitely installed. tested on windows 7 64, both as normal user and as administrator.
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