I have just installed SunRay1 Server Software 1.0 on Solaris 7.  When
I try to login in as a regular new user on the console, it works fine
and it lets me into CDE.  However, when I try logging into CDE as a
regular new user on the SunRay1 appliance, it will not let me in. The
screen flashes for 2 seconds, it looks like CDE gets started, but then
I land at the grey login screen.

In the user's 
$HOME/.dt/errorlog file I see messages like:

ld.so.1: pt_chmod: fatal: libc_ut.so: open failed, no such file or
directory, grantpt error 0.

Root login works from the console and the appliance as well.
How do I fix this problem?

On the SunRay1 Server Software 1.0 release,
apply the latest version of patch 108303 (-03 or higher).
Make sure all patches in the SunRay1 PSD/FAQ (Infodoc 21168) are installed.

Then  edit /etc/dt/config/Xsession.d/0100.SUNWcorona 
and change line 57 from
LD_PRELOAD=libc_ut.so
to
LD_PRELOAD=/usr/lib/libc_ut.so
Reboot your server.