Ok I know how to get round this.
It appears there is some issue with not specifying the domain. If I type in domain\username I can log in, if I just try username then it says it is incorrect.
The server and my client are not in a domain, but I have setup user accounts on each machine with same username and password, so maybe its something to do with this. I am guessing its trying to send across the domain info that my client sits in?
If I try and log in using the default administration account (setup during OS install), I don't have to specify the domain and it logs in fine.
I have now modified the shortcuts in terminals to include the computername in the domain properties, this has got me past this issue.
If anyone else has more on this issue I would be glad to here it.