The error is “windows security enter network password”, no matter what password you enter you will not be able to connect to your Windows XP machine from your Windows 7 PC.
The way that I fixed the problem was to open the local security settings by going to the run box and typing “secpol.msc” then going to local policies, security options, then network security: LAN Manager authentication level, you will select the second one on the drop-down menu with NTLMv2, Send LM & NTLM – use NTLMv2 session security if negotiated. This is what fixed the problem for me.
So I hope the above fix worked for you but I will quickly review how both your Windows XP and your Windows 7 machines should be configured for home networking.
Both machines need to be part of the same workgroup. Windows XP should have simple file sharing turned on. The home networking wizard should be run on Windows XP with file and print sharing turn on.
On Windows 7 make sure you set up the computer name to belong to the correct workgroup. Your homegroup settings should be, turn on network discovery, file and print sharing, turn on sharing, turn off password protected sharing, and allow Windows to manage homegroup connections.
The security software on both Windows XP and 7 should have sharing enable for your local network.
The following is one of many interesting forum post, check it out here, and comment on this page with your results.