I think i have run in to a similiar problem with XTerm not reading the app-defaults file. I've deleted the cygwin directory and reinstalled it several times, and sometimes it works and sometimes it doesn't load up the XTerm defaults file. I then noticed that in the directory: /usr/X11R6/lib/X11/app-defaults/ there is a simlink 'app-defaults' that somtimes points to the /etc/X11/app-defaults/ directory, and sometimes it just points to /etc/X11/ if you remake the simlink to /etc/X11/app-defaults/ it seems to load the XTerm file then.
Bryan