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A shorter version of this very verbose HOWTO.
All users MUST have passwords. Login as an administrator.
Download cygwin's setup.exe from http://www.cygwin.com/ and save it somewhere with a fair bit of space. All the package tarballs will be saved there. Run setup.exe.
Set the "Root Directory" to where you want to install cygwin, e.g. "C:\Program Files\cygwin". Set "Install For" to "All Users".
Set "Local Package Directory" to the place where you saved setup.exe.
Pick a mirror; "http://mirrors.kernel.org" is always good.
On the giant package selector, pick (at least):
You can get an alphabetical package list by clicking the little View button for "Full" view.
Right click My Computer, Properties, Advanced, Environment Variables.
Click the "New" new button to add a new entry to System variables:
Edit the global PATH environment variable to add the 'bin' directory under where you installed cygwin:
Open a cygwin shell.
$ chmod +r /etc/passwd $ chmod +r /etc/group $ chmod 777 /var $ ssh-host-config -y
If the script asks you about "privilege separation", "create a local user sshd on this machine", or "install sshd as a service", answer yes.
If it asks for environment variable "CYGWIN", answer "ntsec tty"
Start it up:
$ net start sshd
$ cygrunsrv --start sshd
If the service fails to start, try:
$ chown system /etc/ssh* $ chown system /var/empty or chown sshd_server /var/empty
Make sure every Windows user has a password set. Then:
$ mkpasswd -cl > /etc/passwd $ mkgroup --local > /etc/group