I was having this same issue.  Cygwin Xserver was working properly under Win 
XP, but the fork failure began occuring when I migrated to Win 7 Home Premium 
32-bit.  My issue was Microsoft Security Essentials was set to default which 
allows it to real time scan all files/directories/real-time processes.  If you 
are also running this, I guarantee it is your problem (or at least one of 
them).

To resolve, open Security Essentials and navigate to the settings tab.  Under 
the "Excluded files & locations" menu, add the cygwin root directory 
(C:\cygwin\ if you used the default install config).  Under excluded 
processes, add startx.exe, startxwin.exe, xterm.exe, and Cygwin.bat.  These 
files will all be in the C:\cygwin\ and C:\cygwin\bin\ directories.

Save the changes to the firewall and give it a shot.



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