You're very welcome. The authentication standards in Windows 7 are far more evolved from XP and this dates back to even Vista. The method you described in your original post is the same way that Symantec End-Point is distributed on a mass-scale through hundreds of computers. This is how I have some background in understanding what you are trying to do. I imagine that for some security purpose extensive alterations have been made to make XP <-> 7 interactions require additional exchanges. The idea that security in XP is lax, whereas in Vista and 7 it is more prominent is not a myth at all. Both of the latter operating systems are seriously security hardened compared to Windows XP. Even on a workgroup, it is going to give you a hassle making connections like this. Server would likely let you make the security changes you want on all of the machines through group policy, but I know you are trying to save the $2,000! Cannot blame you on that one at all. I am curious if your method would work between multiple Windows 7 machines. So whereas if all the machines are on the same platform, would you still have the same problem? For some reason I sincerely doubt that you would. Windows 7 designates Windows XP to be less secure - and perhaps rightfully so to a great degree. Of course it would also be disadvantageous to allow you to control many client systems from another copy of Windows client - why then would you need Windows server? I think this is a thought process that must have gone into the design.
If you are on a mostly private LAN, though, security becomes less of an issue, especially if you have ports that are closed, and secure, on your hardware firewall. The thing is, with XP, when you have disabled the software firewall, disabled simple file sharing, and so forth, it is almost like inviting complete destruction over your systems! The security on Vista and 7, I have found to be, infinitely better, and far less prone to successful attacks. I suspect this extra security is the reason for your problem