i checked current builds and login as chronos after setting a password seems to work for me.
what if you specify a simple password like 'a' ?
what device are you using ? is it a Chromebook, or are you building Chromium OS yourself ? login as chronos only works when cros_debug is enabled, so make sure you have that set in your kernel command line.
just to be clear, it only works for local logins (via frecon terminals which you get via ctrl-alt-f2) and for sudo. it doesn't work for ssh or other remote accesses.
-mike