Actually it happens so far with any user name or password. it also happens with a Desktop user and a different user and password.  So far it does it every time. So i don't think the 48 char password is the case.  I'm setting up a VM at the moment to test it on a clean system.  I'll report back when i get that tested.  As far as Ubuntu version, i am running 9.04 and i thought it was a LTS my bad, but I'm definitely using jaunty amd64.  now my system is tainted by various PPAs but i doubt any of them have updated gnome-system-tools.  is there some way to test where my version of gnome-system-tools cam from?  if you want a list of installed packages and PPAs let me know.  

Since this happens on my system every time I bet this would be a bigger problem if it was everyone. So far I've just found a few isolated reports so I bet it's just some odd conflict.  Could this be a problem/conflict with system-tools-backends vs. gnome-system-tools?

Versions:
gnome-system-tools:  2.22.2-0ubuntu4
system-tools-backends: 2.6.0-2ubuntu8

i just went through my updates this morning before i tested adding a user again.

here's how i can reproduce the problem.
steps to reproduce on my system

system->adminstration->Users and Groups

unlock

adduser button

username: test (or test2)
password: test (or test2)
profile: Unprivileged (or desktop)
Password: generate random password

ok button

new group file

root:x:0:
nogroup:x:65534:

new passwd file
root:x:0:65534:root:/root:/bin/bash
daemon:x:1:65534:daemon:/usr/sbin:/bin/sh
bin:x:2:65534:bin:/bin:/bin/sh
sys:x:3:65534:sys:/dev:/bin/sh
sync:x:4:65534:sync:/bin:/bin/sync
games:x:5:65534:games:/usr/games:/bin/sh
man:x:6:65534:man:/var/cache/man:/bin/sh
lp:x:7:65534:lp:/var/spool/lpd:/bin/sh
mail:x:8:65534:mail:/var/mail:/bin/sh
news:x:9:65534:news:/var/spool/news:/bin/sh
uucp:x:10:65534:uucp:/var/spool/uucp:/bin/sh
proxy:x:13:65534:proxy:/bin:/bin/sh
www-data:x:33:65534:www-data:/var/www:/bin/sh
backup:x:34:65534:backup:/var/backups:/bin/sh
list:x:38:65534:Mailing List Manager:/var/list:/bin/sh
irc:x:39:65534:ircd:/var/run/ircd:/bin/sh
gnats:x:41:65534:Gnats Bug-Reporting System (admin):/var/lib/gnats:/bin/sh
nobody:x:65534:65534:nobody:/nonexistent:/bin/sh
libuuid:x:100:65534::/var/lib/libuuid:/bin/sh
syslog:x:101:65534::/home/syslog:/bin/false
klog:x:102:65534::/home/klog:/bin/false
hplip:x:103:65534:HPLIP system user,,,:/var/run/hplip:/bin/false
avahi-autoipd:x:104:65534:Avahi autoip daemon,,,:/var/lib/avahi-autoipd:/bin/false
gdm:x:105:65534:Gnome Display Manager:/var/lib/gdm:/bin/false
pulse:x:106:65534:PulseAudio daemon,,,:/var/run/pulse:/bin/false
saned:x:107:65534::/home/saned:/bin/false
messagebus:x:108:65534::/var/run/dbus:/bin/false
polkituser:x:109:65534:PolicyKit,,,:/var/run/PolicyKit:/bin/false
avahi:x:110:65534:Avahi mDNS daemon,,,:/var/run/avahi-daemon:/bin/false
haldaemon:x:111:65534:Hardware abstraction layer,,,:/var/run/hald:/bin/false
username:x:1000:65534:username,,,:/home/username:/bin/bash
mysql:x:112:65534:MySQL Server,,,:/var/lib/mysql:/bin/false
ntop:x:113:65534::/var/lib/ntop:/bin/false
sshd:x:114:65534::/var/run/sshd:/usr/sbin/nologin
vde2-net:x:115:65534::/var/run/vde2:/bin/false
tomcat6:x:116:65534::/usr/share/tomcat6:/bin/false
Debian-exim:x:117:65534::/var/spool/exim4:/bin/false
nx:x:118:65534:FreeNX Server,,,:/var/lib/nxserver/home/:/usr/bin/nxserver
clamav:x:119:65534::/var/lib/clamav:/bin/false
synergy:x:1001:65534:synergy user,,,:/home/synergy:/bin/false
test:x:1002:0:test,,,,:/home/test:/bin/bash