To best explain this, follow the narrative:

1. I sign up for an account to comment. I fill out my full profile, including password hint. Submit.
2. I recieve email, requesting confirmation. I click confirm link, CONFIRMED
3. I comment on a blog. (works fine)
4. I click sign out.
5. I click sign in, then 'forgot my password'
6. I type user ID, I type recovery word/phrase
7. I SEE: User has not set birthplace; cannot recover password!!!!!!!!!!!

I tried this 18 times, thinking its too obvious to be a bug... can someone explain this please, how can i fix this? it's driving me nuts.

Thanks!

It's more of an omission. Comment registration creates local commenter accounts which work the same way author accounts do. To recover a password you have to set the recovery phrase (which is birthplace in the author fields) but there's no interface for commenters to access that field when signing up. I expect that in MT 4.1 they might expose that field in the signup screen, and/or make getting to the author profile screen (for commenters) a little easier.

I would still rasie it as a bug.