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Windows authenticated users are required to have the necessary folder level permissions to start the gsrvr process on the ArcSDE server. This is required to establish a connection to the database in ArcCatalog and other client applications. These permissions allow access to a specific folder within the server file system that is required to startup the gsrvr.exe process under the Windows login account.
These explicit permissions may not be required if the folders are already accessible and there are no problems establishing database connections.
These Windows users have already been added in as SQL server logins and have been given database access, either individually or by means of a Windows group that they are a member of.
Attempting to connect from a client machine in ArcCatalog to the ArcSDE server without permissions to the %SDEHOME%\sqlexe folder results in the error.
With Windows authentication, the actual user from the client machine spawns the gsrvr on the ArcSDE server. To do this, the individual Windows login or the group they are a member of must be granted adequate permissions on the SQLEXE folder for the %SDEHOME% location on the server.
To give the particular Windows users/groups the necessary permissions on the server, an administrative user must grant read and execute permissions to the SQLEXE (%SDEHOME%\sqlexe) folder.
'Read and execute' are the minimum requirement for Windows authenticated users to be able to connect to the ArcSDE server, and spawn a gsrvr process under their Windows' login account.