In F12 (at least) it looks like selinux is denying livecd-creator from changing the root password of the image. I'll file a bug on this when infrastructure is back up.
Here is the audit record: audit.log.1:type=USER_CHAUTHTOK msg=audit(1260601250.607:153622): user pid=17278 uid=0 auid=500 ses=26 subj=unconfined_u:unconfined_r:passwd_t:s0-s0:c0.c1023 msg='op=change password id=0 exe="/usr/bin/passwd" hostname=? addr=? terminal=pts/1 res=failed'
Here is the message printed by livecd-creator: passwd: unconfined_u:unconfined_r:livecd_t:s0-s0:c0.c1023 is not authorized to change the password of root
This is with targeted policy 3.6.32-56.fc12.