Hey folks,
I'm happy to report that I just fixed this same issue.
I actually went deep into the machine, removed the hard drive, verified it using another Mac, made a backup of all the files, and then reinstalled the hard drive only to find out that the same problem still existed. A few hours wasted.
Here's how I fixed it:
# Insert the Apple OS X DVD that came with the iMac (mine came with Disk 1 and Disk 2: insert disk 1).
# If the iMac is running already then press and hold the power button for 5 to 10 seconds (hard power-down)
# Now, with the iMac still powered off, press the C key on the keyboard and power-up to boot from the optical drive
# You will see the OS X installation screen... don't worry - there's good news ahead
# You want to choose to do an "Archive and Install" which will literally archive your old OS X installation and reinstall OS X from the DVD. Don't worry: you have the option of bringing your user profiles back to life as well.
For various reasons, at the time of writing this, I still haven't logged in to see what is actually in the user profiles but by the looks of this URL it should be OK.
[http://support.apple.com/kb/ht1710|http://support.apple.com/kb/ht1710]
Don't forget to vote my post up if it helped you please! ;-)