Yep, that's what it is. The format of the old password.
As stated, my old site is PS 1.5.6.3 - on that site; I installed a module that would increase password security.
Password recovery & High-Security Password Storage
Developed by:MADEF IT|Version:1.1.1
He is no longer updating the module because newer versions of PS have better password handling. Unfortunately for me and my customers, there isn't any way to use the passwords after migrating to PS 8.1.2. And now, in addition to that, the password format is causing the forgot password routine to fail.
Because none of the passwords would work anyway, I can copy an updated password in the new format into each customer record, allowing the customer to use the forgot password method.
However, I think a more elegant method will be to install some code to check if email exists at login, display notice of needing to upgrade password, send email verification and allow password upgrade.