Replication error - '-XParentProcessHandle' is not a valid parameter.'

I am setting up a transactional replication between 2 SQL server 2k5 using push method. The distribution db is in the publisher server. It is a very simple setup and has been working for me before. But this time, when I start the snapshot agen after I create a new publication and a new subscription, I encounter an error which is ''-XParentProcessHandle' is not a valid parameter.' and this error is happening at step 2 in the snapshot agent job.
As I said, it is a very simple setup, just one article and I took mostly the default settings during the setup. This has been working for me many many times except this one. The only difference is that I have just recently done a backup and restore of all SQL application and data folders on the publisher server. I was reconfiguring the server with raid 5. Before I did that, I backed up all the mentioned folders. Once I reconfigured the Raid, I reinstalled SQL 2k5 and sp2. Then restored back all the mentioned folders back to the correct path. Everything seems to be working after I restarted the SQL services. I am not sure if this replication problem is related to what I did with reconfiguraing the server. Again, the replication setup is so simple and I can't believe I run into this error. That's why it triggers me to think if restoring the folders doesn't work well in SQL 2k5 or something like that.
Any ideas on this are very much appreciated because I am quite frustrated by this problem.
wingman

Are you thinking that the distributor and publisher are on a different server? Sorry, my orginial email may not be clear enough but I did mention that the distribution db is on the publisher server so they are on the same computer. So the snapshot agent is scheduled in the same server as the publisher and distributor.
The error is occuring when I run the snapshot agent. I thought at this step, distributor is not in use yet but I may be wrong. PLease advice.
Wingman

They are all default values. Are you suggesting I should increase them like doubling it? Right now, I am not even using my production db. To trouble shoot this problem, I created a test db with one table which only has two rows and two columns. This is the only table I am trying to replicate and I am still getting the error message.

As far as checking the path, can you give me some idea where I should check?