Here is what I did to finally get rid of this error with the updated version of 
Ubuntu 7.10:
1. Open a terminal window by Ctrl-Alt-F2
2. At the prompt type "sudo /etc/init.d/gdm stop" without the quotes
3. On the next line type "sudo aptitude reinstall gnome-applets" without the 
quotes
4. If you get an error message you will need to also type "sudo dpkg 
--configure -a"
Don't switch back to the original Gnome window until all the operations complete

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Gnome Login Error
https://bugs.launchpad.net/bugs/164804
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