SYMPTOM
When a user launches an application, the following error message is displayed:

The system could not log you on. Make sure your User name and domain are correct, then type your password again. Letters in passwords must be typed using the correct case. Make sure that Caps Lock is not accidentally on.

If the user enters the password again, the user can then logon.

Cause
This is a known Terminal Services problem that is caused when the DontDisplayLastUserName policy has been enacted on the Terminal Server. The following article discusses the problem:

http://support.microsoft.com/default.aspx?scid=kb;en-us;Q159969

Resolution
There currently is no known resolution for this problem other then removing the DontDisplayLastUserName policy from the machine.