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Event ID: 1001 Source: SclgNtfy

Default local machine policy cannot be created. Error <error code> to open LocalMachinePolicy.
I had the same problem after sysprep of a hardened a W2KSP4 machine. Got it resolved by re-applying the setup security policy and then again our own local policy. To do so just open mmc and add the "Security Configuration and Analysis" snap-in. Open a new database and use Microsoft's "setup Security.inf" template. Apply it on the system. Before re-applying your own security template reboot the machine. After the reboot re-apply your policies. If you changed services, NTFS & registry permissions outside your policy please check this also.
Error code: 80070005 - Error on Win2k SP3 TermServ after sysprep and image. The fix was to rename the \system32\GroupPolicy folder to GroupPolicy.old, then create a new blank \system32\GroupPolicy folder. Run gpedit.msc. This will re-create the LGPO. You will have to recreate any local policy settings that you want enabled.
Error code: 80004005. In my case the error occured because administrators were locked out to get local policies by denying access to c:\winnt\system32\GroupPolicy.

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