A friend of mine was recently bit by this bug too.  They also upgraded
to 7.04 from 6.10.  After the upgrade, the system would simply hang at
the busy cursor while loading GDM.  To correct the problem on their
machine I purged gdm and ubuntu-desktop (since it depends on gdm) and
reinstalled them.  After reinstalling these two packages everything
appears to be working fine.

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gdm hangs before login
https://bugs.launchpad.net/bugs/113067
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