i figured out the password issue last friday. apparently the issue was NOT the password, but the login. see if the user registers with a username where the first letter is capital, they will not be able to log in. fun, no?

http://mu.wordpress.org/forums/topic.php?id=6217&page&replies=13

Possible fix:

http://n0tablog.wordpress.com/my-wordpress-plug-ins/insensitive/

and phpmyadmin instructions for updating password:

http://www.tamba2.org.uk/wordpress/phpmyadmin/