Jean-Baptiste Marchand pointed out an article by Microsoft Senior Security Strategist Jesper Johansson in the August 2006 issue of Microsoft's on-line TechNet newsletter. The article describes how LMCompatibilityLevel really works or, at the very least, the latest iteration of the author's understanding of this difficult security setting.

It's a very worth-while article and provides additional and useful insight into the wonders of LM, NTLM, and NTLMv2 authentication.