The Windows 98 boxen here run with PlaintextPassword, as does the smbd. Since we will be moving to an NT-based system in the future, I set "update encrypted" to yes, and smbpasswd fills nicely over time.
However, I have run the password cracker 'john' over smbpasswd and had to see that all the passwords stored are in uppercase rather than whatever the user typed (normalcase). I know that LANMAN from Win95/98 uppercases all characters, but as smbd tries all upper/lowercase combinations for authentication against /etc/shadow, smbd should also write the correct-case password to smbpasswd.
The problem I see is that once we moved to Windows XP - and only smbpasswd without /etc/shadow is used - that everyone has an uppercase only password, which is not good.
Sorry for the false alarm. "John" only decrypts the LANMAN part, without looking at the NTLM field.