I first described NTLMv2 in tip 0976.
You can install NTLMv2 support for W9x clients by installing the Directory Services Client from the Windows 2000 CD-ROM at Clients\Win9x\Dsclient.exe. This also installs Secur32.dll, Msnp32.dll, Vredir.vxd, and Vnetsup.vxd which support the enhanced authentication. Even if you uninstall Directory Services Client, these files will remain.
To verify the install, right click %SystemRoot%\System\Secur32.dll and choose Properties. The Version tab should read Microsoft Win32 Security Services (Export Version) or Microsoft Win32 Security Services (US and Canada Only).
To enable NTLMv2 on the client, set LMCompatibilityLevel to 3.