Take a look at conversion of usernames to lowercase. If you convert it in wp_login function, you have to do the same conversion in wp_setcookie function or you have to not convert it at all.
Maybe it would be useful to add a checkbox in admin page... If it would, I can do this. For my installation I just commented strtolower($username) in wp_login.
And once more note.
It have to take care about UTF-8 characters in username. Since WPMU uses UTF-8, it will be better to convert using multibyte string functions, i.e. mb_strtolower. Or if you don't want to do so, it will be better to set locale to POSIX for convert only ASCII characters:
setlocale ( LC_CTYPE, 'C' );