Did you check the config.xml file in the /servicenow/midserver1/agent directory on midserver1's host machine?
Line 29 will have the user name that midserver1 is passing to your instance and as Jeff and Sukraj said you should find it's passing "mid user" not "midserver".
<parameter name="mid.instance.username" value="mid user"/>
"mid user" and "midserver" are two different user records from sys_user.list with two different sys_ID's.
Did you attempt to install any other MID Servers on your host that might still be running and attempting to login to the instance with the "midserver" user name but never connected due to the authentication failures?
If you only intend to have one MID server running then check in the servicenow directory at root/top level on your host machine. If you have more than one subdirectory there you may have another MID running.
You can check your running processes and services also. If you're not sure if there is an extra MID running there you can always stop the midserver1 service and after it shuts down check to see if there are still any processes/services running for servicenow or snc.
There's a lot of possibilities but you'll need to figure out what is passing the "midserver" user name with an invalid password to your instance.
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