Here is the workaround for this bug:

For those who are stuck in the same problem as me (encryption enabled in
Gutsy/Intrepid, and cannot disable after Jaunty upgrade), here are the
steps:

1. Open a Terminal (Applications -> Accessories -> Terminal)
2. Type gconf-editor and press Enter
3. Navigate in the tree pane of the Configuration Editor to: 

/desktop/gnome/remote_access

4. Uncheck the "require_encryption" option.
5. Logout and log back in or restart.

That's it. Hope that helps somebody

-- 
upgrade removes "encryption required" but doesn't update config
https://bugs.launchpad.net/bugs/369181
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