I applied following solution with success : http://social.technet.microsoft.com/Forums/windows/en-US/78fbca5c-41ad-4fa6-8ccd-f52045333fdd/windows-7-firewall-fails-to-restore-default-policy-error-3?forum=w7itprosecurity&prof=required
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Ok - I think I have an answer. Looks like the Firewall polices are corrupted in some weird way. I found a recommendation:
export firewall polices from a Windows 7 computer that does not have this problem. (Option on the right most panel of the 3 panel screen for Windows Firewall)
Copy the .wfw file you exported to your bad firewall computer.
Use the "import Policy" option in Windows Firewall to replace the firewall policy on the bad computer.
It fixed my issue. Firewall is working and shared folders also.
Hope it helps ! Eric