I can reproduce this on Edgy with gnome-panel 2.16.1-0ubuntu2

** Changed in: Ubuntu
Sourcepackagename: None => gnome-panel
     Assignee: (unassigned) => Ubuntu Desktop Bugs
       Status: Unconfirmed => Confirmed

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Changing panel orientation with Expand unchecked produces undesired results
https://launchpad.net/bugs/40082

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