Xp virtual machine error your interactive logon privilege has been disabled

I've installed the XP Virtual machine on a windows 7 base insall then within the newly created virtual machine installed XP Pro SP3. There were no problems or error messages during the installations. The windows xp install was joined to our domain again with no problems. Integation features were enabled and the user who's machine has the XP virtual machine can't login. He gets the following error: Your interactive logon privilage has been disabled...

I can logon with another user account with no issues. I did find that if I disable the Integration Features in the Virtual Machine then the user can logon with no problems, turn Integration Features back on and the user again can't logon and gets the error about diabled interactive logon privileges.

Any ideas what the problem could be? I don't want to leave the Intergration Features off because the user has a lot more functionality with them on.