I had the same problem on my desktop, booting Windows XP. On boot, instead of the logon screen, I got a message box from lsass.exe saying, "When trying to update a password, this return status indicates that the value provided as the current password is not correct." Then the system would restart itself, and re-display the message, over and over.
I was eventually able to recover as follows:
1. I installed a second bootable drive in the PC and booted into it. Then the first (bad) drive (now labeled D
was visible under Windows explorer.
2. I copied all files from D:/Windows/repair into D:/Windows/System32/config , just press yes to all when asked if you want to replace files.
3. The drive boots back to normal and i saw no problems with password issues.!!
the only thing is you have to have a fat32 partition. i am not sure if it will work with ntfs.
this is really an easy pain free method though.
good luck all!!