I've struck this issue a few times, always with Windows 7 clients and Server 2003.
If you can't log in locally try logging in as a domain administrator with the network disconnected (unplug LAN and disable wireless), this will allow the use of cached credentials.
Once your in ..
Reset the local administrator password
log off and on as the local administrator to test it
Disjoin the domain (change to a workgroup member instead)
Restart as prompted
Log in as the local administrator
Rejoin the domain
Freakykiwi: You are a freaking genius. This was simple and painless. Thank you very much!