1. You can use the resource kit tool, Ntrights.exe, to change the local logon rights. For example, you could run this command: ntrights -m \\ProblemComputer -u Administrator +r SeInteractiveLogonRight.
2. You can open a command prompt from another computer on the same network, issue the command Net use x: \\ProblemComputer\C$ /u:Administrator, and then change to the directory %SystemRoot%\Security\Database. Rename Secedit.sdb to Secedit.old_sdb and copy a working version of a Secedit.sdb file from another computer running the same operating system (for example, Windows 2000 Professional).

A user tries to log on to a Windows machine and receives the error message “The local policy of this system does not permit you to log on interactively.” This can happen in a number of scenarios, and the way to resolve the issue depends on the cause of the problem.
Solution A

If the Local Security Policy is set to disallow local logons to Everyone, then the error message will pop up for any user who tries to log on, including an administrator. This can be fixed in a couple of ways:

1. You can use the resource kit tool, Ntrights.exe(http://support.microsoft.com/default.aspx?scid=kb;EN-US;279664), to change the local logon rights. For example, you could run this command: ntrights -m \\ProblemComputer -u Administrator +r SeInteractiveLogonRight.
2. You can open a command prompt from another computer on the same network, issue the command Net use x: \\ProblemComputer\C$ /u:Administrator, and then change to the directory %SystemRoot%\Security\Database. Rename Secedit.sdb to Secedit.old_sdb and copy a working version of a Secedit.sdb file from another computer running the same operating system (for example, Windows 2000 Professional).

Solution B

In Active Directory, if a Group Policy is set to Deny Logon Locally, users will encounter this error. In order to mitigate the problem, an administrator will need to change the policy, as explained in this tip.
Solution C

If this error message pops up while a user is trying to connect via Remote Desktop or a Terminal Services connection, the administrator will need to take a different set of actions. For a Remote Desktop connection, Microsoft Knowledge Base Article 289289 explains how to overcome this error.

For Terminal Services clients, this error message could be caused by Terminal Services being installed on a domain controller; this tip explains what needs to be done in that case. For Windows NT Server 4.0 Terminal Server Edition, there could be a different problem, and Microsoft Knowledge Base Article 186529 shows what can be done to resolve the issue.

Try and login in the safe mode and then rename the wpa.dbl file on the computer and then restart the computer and the computer will promnpt for the activation please activate the computer using the phone activation
NOte: Do not use online activation

Once the computer accepts the key or the activation computer will allow you to login on the computer without any problem

Other simple resolution will be performing a repair installation but while performing a repair installation the computer wil be out of domain and needs to be reconfigured for the domain settings

Thanks and regards

Amit mehta