I have a client that doesn't not have money to pay for the repairs I have done, BUT she wants the computer in her sights. How could I lock the system up so that she cannot use it or crack the password of some sort? I need an efficient method. The OS is XP SP3 x86.
It's simple: if you haven't been paid for the services you provided, then that is theft on your client's part. Don't return the computer if she hasn't paid for the repairs you made. It doesn't matter how unfriendly your client is, you shouldn't let her bully you into working for free. I don't know exactly how she's "demanding" her computer back, but unless she's threatening you with violence (in which case you should report it to the authorities), you are under no obligation to return her computer if she hasn't paid you.
If you return the computer but retain the hard drive, you will probably make the problem worse, not better, as it will just aggravate your already unfriendly client. Instead, either forcer her to pay you, or else undo whatever fixes you made, and return the computer exactly the way you got it. If you keep part of her computer, she may have grounds for complaint against you, but if you return it exactly the way you received it, and she hasn't paid you, then you're even, and you haven't done anything wrong.
Another solution would be to return the computer in full working order with an invoice for the services you provided. Keep a copy of the invoice, and if she doesn't pay within the amount of time you specify (30 days is common), then pursue legal recourse. While it would be best to avoid, people are sometimes more cooperative when you bring lawyers into the picture. This may or may not be worth it, depending on how much the repairs were worth, but it's a thought at least.
Back it up, install TrueCrypt, and encrypt the entire volume.
(Methods relying upon local Windows authentication can be bypassed, as you seem to be aware.)