Light Speed, Check the thread mentioned earlier
(
http://forum.x-cart.com/showthread.php?t=41583 ) as it has a fix for this.
Also check page 4 of the same thread.
Please note that you need to pay attention to the variables "eregi" and "!preg_match" depending on what version you have (it really should be in your signature). You can choose to allow uppercase letters and symbols if you want to but since it is part of a security update I chose uppercase letters only as the thing added. It has no effect on existing customers or passwords, just new user names only.