I had the same problem; this was an ibook that for a faculty member here on our campus. I installed the OS 9 updates, then did a clean install of OS 10.3. I don't know what password it was asking for, because the only one I'd entered was "education" and that didn't work. I even went in as root, but the Keychain Utility was of little use, other than a message regarding System>Library>Keychains. I went into that folder, and copied the two files in there to Documents (in case what I was about to do didn't work), then I deleted the two files from the System Keychain folder. Everything worked fine after that, and the prompt didn't reappear.
I agree; the keychain deal is bogus.