It's a really hard to describe problem, so here's the story step by step:
Last time my computer was on, I redid the installation of the nvidia driver in this manner:
$ sudo apt-get --purge remove nvidia* //this removes the linux-generic and linux-restricted-modules as well
$ sudo envy -t
... //gives API mismatch error; can be fixed with the NVIDIA driver below
$ sudo sh /root/NVIDIA-Linux-x86-1.0-9639-pkg1.run
$ sudo /etc/init.d/gdm start
and everything was fine. I got compiz and desktop effects working, etc.
I shutdown the computer and started it today again.
After the Ubuntu Logo splash went away, I got the NVIDIA logo and the login screen. I logged in but the splash screen that pops up as the desktop is loading did not go away until I clicked on it. The last time I'd logged in, I had enabled desktop effects, but now there was nothing. The gnome panel icons for ethernet connection, laptop power and update manager did not show up for another 30-40 seconds.
After logging in, I came to this forum, read your post, created the log file and posted it. Just a few minutes ago I went to System-> Preferences -> Desktop effects where I saw that desktop effects were enabled eventhough there were no effects; I disabled it and upon trying to enable it again, I got the message: "Desktop Effects could not be enabled"; I went to System -> Administration -> Restricted Drivers Manager and I got the message: "You need to install the package linux-restricted-modules-2.6.20-16-generic for this program to work". But I should have that installed from last time since I made absolutely no modifications to ANY installed package/program since the last time when everything was working fine.
Another interesting symptom (reflected in the second to last line of the nvidia-bug-report.log):
segmentation fault (core dumped)
Now based on the past few times I've done this, I'd guess that on the next reboot, the X server won't even start in the first place and it would crash.
Going to try it right now...