What authentication mechanism are you using with GDM?  GDM supports crypt, shadow, and PAM.  If you are using PAM, then PAM module you are using (refer to /etc/pam.d or /etc/pam.conf and the man page) is doing the actual authentication.  If it is PAM, this is probably not a GDM bug.  When you run configure, it tells you in the report it spits out in the end which encryption method it is using. 

I confirm this bug with Ubuntu dapper build.

./configure output:

GDM2 configuration summary:
===========================
CFLAGS : -g -Wall -O2 -Wall -Wmissing-prototypes 
LDFLAGS : 

prefix : /usr
sysconf : /etc
sysconfsubdir : gdm
gdmconf dir : ${sysconfdir}/${sysconfsubdir}
dmconf dir : /etc/dm
bin dir : ${exec_prefix}/bin
sbin dir : ${exec_prefix}/sbin
PAM prefix : ${sysconfdir}
data dir : ${prefix}/share
X server : /usr/bin/X

TCP Wrappers support                  : YES
Xinerama support                      : YES
XDMCP (remote login) support          : YES
Secure remote connection              : NO
DMX (Distributed Multihead X) support : YES
Console helper                        : NO
SELinux support                       : YES
Solaris Trusted Extensions support    : NO
Authentication scheme                 : verify-pam
Extra utilities built                 : gdmopen gdmaskpass gdmprefetch

Therefore, it seems to be a PAM bug.

Yes, closing this bug, please file it with the PAM maintainers for the PAM module you are using.

The Ubuntu package use PAM, I'll ping the maintainer about that, thank you for pointing it