[Samba] password lookup fails setting up server based security

[Marc Grober]

I am trying to do server security w/ samba 2.2.0  I have set security = 
server and have set encryption  = yes
I have tried to set the server to a win2k box as well as to an AS/400 
running OS/400 server for network neighborhood. The log reflects that 
the unix system is connectiong to the server (and calling winbind though 
I haven't touched it at all) and then I finally get this or equiv:

[2002/04/22 14:08:33, 10] lib/username.c:user_in_list(407)
   user_in_list: checking user  in list mgrober
[2002/04/22 14:08:33, 2] smbd/service.c:make_connection(323)
   Invalid username/password for marcsdir []

Do I need to create machines accounts for server security?
What am I missing?