After a recent Windows Update I could no longer access the folders on my Windows XP file server. A window popped up asking for a username and password even though they are both the same on the two computers. The error message each time was “Logon failure: unknown username or bad password.”

I typed in my username and password five times. It reached the point where I thought I had gone crazy and was typing in the wrong one: it kept on coming back to me with the dreaded “Logon failure: unknown username or bad password.”.

I quickly returned to my senses and guessed something was up with the authentication between XP and Windows 7. A few Google searches later I found out that a Local Security Policy needs changing.

• Open the Start menu
• Type “Local Security Policy” in the search box
• Open Local Security Policy
• Navigate to “Local Policies” -> “Security Options” and then locate the entry named “Network security: LAN Manager authentication level”. Double click on it.
• In the dropdown list choose “Send LM & NTLM – use NTLMv2 session security if negotiated
• Click OK

It seems that a recent Windows Update has changed that policy’s settings to be undefined, which —from what I can tell— forces NTLMv2 session security always. My XP installation mustn’t have NTLMv2 capability and that is why I kept seeing “Logon failure: unknown username or bad password.” errors.

After changing the local policy I was immediately able to connect to my network shares again.

Source: http://maian.org/blog