Found the problem. I was getting bit by this bug:

http://defect.opensolaris.org/bz/show_bug.cgi?id=13437

Hope it gets fixed for the real release as it's going to cause issues for 
upgrades from 2009.06. 

Edit /etc/passwd and change the home dir for the user "gdm" and it all works 
now. I didn't notice it till tonight as I don't use the local console much.
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