NT LAN Manager (NTLM) is a security system for Windows products. NTLM improved upon the earlier LAN Manager (LANMAN) but has largely been replaced by Active Directory for most purposes.
NTLM version 1 is currently deployed only for support of legacy systems over a decade old. NTLMv2 shipped originally with Windows NT 4.0 SP 4. Of the two, NTLMv2 is to be preferred. Active Directory (using Kerberos authentication) is better still, but current Window products still default to NTLMv2 in selected situations for which Active Directory is not available. NTLMv2 Session Security contains a client-to-server challenge, analogous to MS-CHAP.
References:
http://msdn.microsoft.com/en-us/library/windows/desktop/aa378749(v=vs.85).aspx
http://technet.microsoft.com/en-us/magazine/2006.08.securitywatch.aspx