Unable to remote desktop from windows 7 to windows xp

Make sure Windows Firewall is turned off or has an exception for the incoming IP, Also right click my computer go to properties, go to remote tab, enable remote connections on both machines and Allow users to connect this system...

The XP system is it XP home?
You cannot use Remote Desktop Connection to connect to computers running Windows XP Home Edition.
Also
You cannot use Remote Desktop Connection to connect to computers running Windows Vista Starter, Windows Vista Home Basic, Windows Vista Home Basic N, or Windows Vista Home Premium.
You can, however, connect from those editions of Windows Vista to computers running other versions of Windows.
Source Microsoft

 XP Home doesn't have the remote system needed to be running the Remote Desktop Service
known as Terminal Services.
Possible workarounds is something like pcAnywhere
http://www.symantec.com/business/pcanywhere
and
GoToMyPC
http://en.wikipedia.org/wiki/GoToMyPC
http://www.gotomypc.com/remote_access/remote_access

Don't think this is a firewall problem, eventvwr shows an encryption error on the client side means it can get to the XP box but fail to complete the connection.

It is XP Pro.

Just to clarity this is NOT a firewall problem as others can connect to the XP box. Only the trouble Win 7 with SP1 with rdp 7.1 is having the problem.

It appears to me that is the rdp version or encryption level is preventing the connection handshake.

Try after installing RDP 7.0 if the XP box is at SP3:

http://support.microsoft.com/kb/969084

Dont know if it's relative but windows 7 file sharing  uses 128 bit encryption
Control Panel\Network and Internet\Network and Sharing Center\Advanced sharing settings
In Windows 7, run the OpenVPN Gui client as adminstrator... right click on the item in the start folder in order to access that option.
I did fnd another MS article
Why can’t I connect using Remote Desktop Connection?
scroll down to>
•To view or change server authentication settings:
http://windows.microsoft.com/en-US/windows7/Why-can-t-I-connect-using-Remote-Desktop-Connection

0x6,
That might work but not preferred because that's mean I have upgrade all the XP boxes.

Merete,
I will take a look at when I get a chance.

Thanks.

Merete,

Checked the encryption and it set to use 40- and 56-bit.

Maybe your choices are limited now and seem to point to upgrade all xp boxes.
Microsoft seems to push everyone in that direction then things just work

Resolved the issued.