@Robert Hooker - Thank you, Alberto Milone's PPA solved the issue.
Desktop Effects activated with 96.43.17 and the password at GDM login is
now working!

This is what I have done:
-Installed Ubuntu Desktop i386 (20100419.1) test ISO on Wubi (ONLY TO TEST ;-) )
(Other Bug found & FIX  - if installation at 93% + stops, press enter
or move the mouse to awake the installation again and again until finished!)
-When offered the installation on NVIDIA proprietary drivers, refuse and add 
the PPA to the sources.
-Search for updates, then install  the new PPA nvidia-96 mode aliases  
(96.43.17)
-Restart the system and activate Desktop Effects if not already ebabled.

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Mouse and keyboard stop working after selecting user
https://bugs.launchpad.net/bugs/553200
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