Ubuntu 11 and later use lightdm rather than gdm, and vglserver_config doesn't yet grok how to invoke vglgenkey when lightdm starts up.
Workaround is to switch to gdm:
/etc/init.d/lightdm stop
apt-get install gdm
(this automatically runs 'dpkg-reconfigure gdm', but you can manually re-run it if the gdm package is already installed.)
/etc/init.d/gdm start
Now vglserver_config should work properly.
Fixed in trunk