We have an old windows 2000 terminal server (which is also a domain controller). THe error we're getting is "Local Policy of this system does Not Permit You to Log On Interactively"

The user is part of the group "Terminal Server Users". The ou of the user is Users.

Any ideas?

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Only Domain/Enterprise Admins are permitted to log into DC's.

if you REALLY need a regular user to be able to log in, it can be adjusted in the Default Domain Controller Computer Security Policy.

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+1 That is the solution – Dave M Jan 12 '10 at 21:21
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