This is a pretty common question, actually, so don’t feel bad at all. What is actually happening here is that the keyboard is working, it is just not echoing anything to your screen (not even the asterisks you may be used to seeing with some programs when you enter a password).
This is a security feature to help mask your password (those programs that show asterisks may hide the characters, but not the length of the password). The “enter” key seems to work, because you see something happen, but trust me on this … enter the correct password and hit the enter key, and you will be logged in.
–DreamHost Tech Support