This bug seems to affect the MikTeX version of TeXWorks, but not the "official" one. I posted this bug report to the TeXWorks mailing list on May 9, but saw no response there.
When running a typesetting tool, TeXWorks constructs the HOME environment variable incorrectly. For example, before starting TeXWorks I have no HOME set, just HOMEDRIVE and HOMEPATH. (This is pretty standard in Windows 7; not sure about other versions).
When I start TeXWorks and create a fake typesetting tool that runs cmd.exe, I can type SET HOME in the console prompt, and I see this:
HOMEPATH=\Users\murdoch
HOME=C:\Users\murdoch
HOMEDRIVE=C:
Notice the double backslash after C: in HOME. That's not a valid path on Windows, so my real typesetting tool (R running Sweave) fails when it can't find the user's home directory.
The double backslash disappeared in the posting! The HOME env variable appears as
HOME=C:\\Users\murdoch
Thank you for the report! I have fixed this now. An update will be available soon.