Finally got it going!
Here are the steps:
1. Add this to your registry:
[HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\services\PolicyAgent]
"AssumeUDPEncapsulationContextOnSendRule"=dword:00000002
2. Open secpol.msc (click start > search for secpol.msc)
- Local Policies > Security Options
- Network Security : LAN Manager Auth Level…
- Set to: Send LM & NTLMv2 - UseNTLMv2…
And
- Network Security : Minimum session security… clients
- uncheck "Require 128-bit encryption"
3. Restart PC
4. Create VPN Connection on Windows 7
- Host Name: (server IP or yourhost.name.com)
- PPP Settings : Enable LCP (only)
- Type: L2TP/IPSec
- Pre-shared key : yoursharedsecret
- Data encryption : Optional encryption
- Allow CHAO and CHAPv2
5. Router on server-side must allow VPN Passthrough and forward ports: 50, 51, 500, 548, 1701, 1723, 4500 to the server box. Also, do not filter anonymous internet requests, multicast or NAT Redirection but enable SPI Firewall.
I now can successfully VPN from Windows 7 to MAC OSX Lion Server! YAY!