LTSP on VM's. The clients boot flawlessly. I've got the basics figured out except no internet access on the clients. One problem at a time. The server VM is Debian Wheezy, the actual chroot is also Wheezy.

I am adding users to the system via : I have done this from a sudo while logged into a client. And I have done it directly on the server inside the chroot. The exact line above worked fine to create the first user and I can login perfectly. Any additional users I create though when trying to login just goes in a circle. Login screen > enter info > screen goes black > login screen again.

I don't know if this is an LTSP issue... pretty sure it isn't as this is inside the chroot. For what it's worth I am updating the image everytime I try adding users and such but no dice as yet.

What am I missing? Or possible causes for this issue?

useradd is a "low level utility" as the manual says. The recommended way is to use adduser. Maybe something wasn't set right. Can you login into a console session? (Press ctrl-alt-F1 to open a console when the login screen comes up)
Also might inspect system log files to see what is going wrong upon login.

you never specified the users home directory, the folder needs to be created and then specified as the login folder in order for it to work. also, the password will need to be configured.

... which by the way is something that adduser would have done for you ...