It took my some time to find a fix for this problem, this is why I am posting this;
For those who use the iPhone terminal, you may hit this problem on FW 1.1.3/4 where you cannot login as root.
When you open the terminal, you're automatically logged as 'mobile' user with limited privilege, to switch to root user run 'su root' and use 'alpine' password, however you may get the error message "incorrect password" this problem is fixed by:
1. Run Installer app and add the source "iphone.lenlolabs.com"
2. Install "BSD Subsystem 2.x SU Replacement"
3. Restart your iPhone
After this you can be root, remember "With great power comes great responsibility" !