Comment 32 for bug 240437

I can confirm that this is still an issue in freshly (from scratch) installed Karmic (9.10), updated to current as of 7 Jan 2010. This is on a fit-PC 1.0, so the statement above in the thread about it being a slow PC applies. Since the technical info has been handled above, I'll add some less-technical, but hopefully useful notes:
* The users and settings applet seems to start up very slowly (even relative to the slow system).
* The hosed groups file causes the administrator to lose sudo ability, requiring a reboot to single-user mode (not possible due to next item), or from a live CD.
* The hosed groups file causes the system not to boot, as dev/pts in mtab has a group= option, and when the group is missing, the mount fails due to "bogus options".
* Since running into this bug on my first install on this machine, I backed up /etc/group and /etc/passwd before using the Users and Groups tool on the reinstall. After the files were hosed, restoring from the backup (via a bootable CD, as sudo was unusable, and the system wouldn't boot from the root HD) fixes everything, not only that, but after restoring from the backup (simply "cp /etc/group.bak /etc/group") and rebooting, the Users and Groups tool works perfectly, and starts up much faster than before (relatively). No idea why.
* Your theory about the bug is correct, as long as the users appear in the list correctly when the Users and Groups tool launches, everything works fine. It is only when the tool launches with a blank users list that there is a problem.