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In teaching dial-up remote access, I have the students use a null-modem cable between a workstation and server to test, which works perfectly in Windows Server 2003/XP Pro, as it did with Windows 2000 Server/2000 Pro. With the 2000 components, I would use PAP for authentication on both to avoid any security issues to begin with. However, using PAP on Win2003 Server/XP Pro won't authenticate and gives Event Viewer errors both on the server and Pro. I've checked rights/security options, etc., and can find no obvious setting to correct this. The only way to authenticate with the newer systems is to use the more secure Microsoft-Chap, etc. Is there a way to get PAP alone to work between 2003 Server/XP Pro?
Windows Server 2003 and XP both support PAP authentication. Verify that you don't have any Group Policy or Remote Access Policy configuration that mandates a higher level of encryption for Remote Access clients that might reject less secure methods like PAP.