I confirm this bug on kubuntu 8.10 and on current jaunty (as of today's date).
I didnt realise it was due to likewise install....
1) After editing the common-password file i was able to change passwords fine :)
2) I have also installed libpam-cracklib to make sure a new update doesn't 
recreate the problem

thanks for the pointers ;)

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likewise-open prevents local passwords from being changed
https://bugs.launchpad.net/bugs/302026
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