I have a similar problem with Windows 95 Clients. If the length of the username is truncated to less than 17 characters, then the USE statement works fine. This may or may not depend on the server name length too but I haven't checked that. In my case the server is called DAN_SERVER.
I haven't installed KXRPC service. Will this solve this issue? It would be great to get a solution otherwise I have to check for length of username across all the users (lots of them).