Checked "Require a password reset on next login" on my account, can't log in anymore
On your local installation if your check the "Password Reset Required" button for a user and you get a 500 Internal Server Error the next time that users logs in, there is about a 99% chance that email isn't configured/installed correctly on your server.

You can verify this by checking the craft/storage/runtime/logs files for the underlying error message.

Craft's email settings are managed under Settings->Email in the control panel.

When you tested on http://demo.buildwithcraft.com and saw the same behavior, that's because we specifically disabled all email functionality on the demo sites in order to prevent them from turning into SPAM relays.