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.
Don't forget to vote my post up if it helped you please! ;-)