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Yes, you will need an updated driver for the camera to operate it on a Windows 7 system. Unfortunately, Casio does not list a Windows 7 driver for the EX-Z40. At this point your only recourse to to email Casio via the link below or call them at 1-800-435-77332.
You can try to "fix" this problem by holding down the shutter release button as soon as the camera power up.If this does not work you will need to replace the lens assembly. This should only be done by a qualified tech.
This is usually caused by one of two circumstances. (1) The user dropped the camera while the lens was extended causing a mechanical failure. (2) The lens attempts to extend while in a pouch or pocket without the user's knowledge. This usually happens when the user is carrying the camera with the battery in. When/if the REC button or power button is pressed accidentally, the lens will attempt to extend but can't. This causes the servo motors to "smoke".
Try blow compressed air around the lens, this might help if something stuck in the lens causing it not to retract. you can also try other suggestions from the link below. it's not for the same camera but it might help.