For a standalone system the solution is simple, just use the same version of Windows a copy a good version of:

C:\windows\Security\Database\secedit.sdb from another computer.

Then you should be able to login again without getting the nasty message "Local policy does not permit you to log on interactively."

Of course you will probably need a way of accessing the filesystem off-line in order to get to it such as a Linux boot disc.

Some other alternative methods are listed here:

http://articles.techrepublic.com.com/5100-10878_11-5313668.html

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