You get this error when a user is not added to the remote desktop users or you haven't allowed remote desktop users to… well actually… to login remotely. To do so, first add the group to the Remote Desktop Users list:

• Go to Start → Settings → Control Panel.
• Double-click System, and then on the Remote tab, click Select Remote Users.
• Click Add and type the user account name, and click OK.

Secondly, make sure that the Remote Desktop Users group has sufficient permissions to log on through Terminal Services. To do this, follow these steps:

• Click Start, click Run, type secpol.msc, and then click OK.
• Expand Local Policies, and then click User Rights Assignment.
• In the right pane, double-click Allow logon through Terminal Services. Make sure that the Remote Desktop Users group is listed.
• Click OK.
• In the right pane, double-click Deny logon through Terminal Services. Make sure that the Remote Desktop Users group is not listed, and then click OK.
• Close the Local Security Settings snap-in.

http://support.microsoft.com/?kbid=289289