I've been playing with this and I must say its Hella Cool.

http://sources.redhat.com/cygwin/xfree/

Got it running at work on the NT4 box I have the pleasure of staring at 
8hr a day at work. Colors are a bit whacked at 16bit color mode, doesn't 
want to do 32 or 24, but 8bit works. But then you have all the problems 
of running X in 8bit color. :P Alt-tabbing causes the alt and tab keys 
to get stuck in the X server, so you have to remember to hit alt and tab 
to unstick them when you come back to it.

Now what I want is an xtermish thing for Win32. You know the "DOS" 
window that comes up when you run Win32 console apps? Is there hooks to 
replace that? Because the default thing sucks ass. No scrollback and 
nothing more than 80x24. If they could hook PuTTY into that I'd be all 
set. Or if xterm or rxvt would just work right (something weird with the 
localisation libs) and they got the X server running along side windows 
instead of a full screen app...