Crowd update from 1.1.0 to 1.1.1 fails with 'Invalid application password authentication: crowd'

Upgrading standalone demo Crowd 1.1.0 to 1.1.1 fails, when the database folder is copied over even with all the crowd.properties have passwords set to match. Console window throws errors and does not allow to login. Similar problem happens if a new repository is created and then backup file is imported (might be a different issue).

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Top of the log file:
14:12:27,519 INFO com.atlassian.crowd.startup: Starting Crowd, Version: 1.1.1 (Build:#182 - Jul 26, 2007)
14:12:31,180 INFO com.atlassian.crowd.upgrade.UpgradeManagerImpl: Running upgrade task for build - 1: Sets the server id in the datastore if one has not been set
14:12:31,180 INFO com.atlassian.crowd.upgrade.UpgradeManagerImpl: Running upgrade task for build - 2: Removing cache time property from the database
14:12:31,180 WARN atlassian.crowd.model.property.PropertyDAOHibernate: Failed to find Property with name: '1' to remove
14:12:31,180 INFO com.atlassian.crowd.upgrade.UpgradeManagerImpl: Running upgrade task for build - 3: Setting the Hi-Lo value in the database if it has not already been set
14:12:31,180 INFO com.atlassian.crowd.upgrade.UpgradeManagerImpl: Running upgrade task for build - 112: Adds missing paged results option to the LDAP connectors.
14:12:31,258 INFO com.atlassian.crowd.upgrade.UpgradeManagerImpl: Running upgrade task for build - 113: Set encryption method for all current Internal Directories to be DES
14:12:31,274 INFO com.atlassian.crowd.upgrade.UpgradeManagerImpl: Running upgrade task for build - 114: Upgrading application passwords from DES to Atlassian SHA-1
14:12:55,177 INFO atlassian.crowd.manager.application.ApplicationManagerGeneric: Invalid application password authentication: crowd
14:12:55,287 INFO atlassian.crowd.manager.application.ApplicationManagerGeneric: Invalid application password authentication: crowd
14:12:55,287 INFO atlassian.crowd.console.action.BaseAction: Invalid application client.
com.atlassian.crowd.integration.exception.InvalidAuthorizationTokenException: Invalid application client.
at com.atlassian.crowd.integration.service.soap.client.GenericClient.authenticate(GenericClient.java:230)
at com.atlassian.crowd.integration.service.soap.client.SecurityServerClient.isValidToken(SecurityServerClient.java:59)
at com.atlassian.crowd.integration.http.HttpAuthenticator.isAuthenticated(HttpAuthenticator.java:137)
at com.atlassian.crowd.console.action.BaseAction.isAuthenticated(BaseAction.java:102)
at com.atlassian.crowd.console.action.Login.execute(Login.java:84)

Full log file is attached.