I recently had this issue with Crystal Reports 10 I was using a SQL database for the backend and connected using the odbc driver, everything was fine except when I went to execute the report from my .Net app, I got a dialog box that I needed to login to the database. Even though I entered the correct password it still gave me "Pasword is incorrect". Well, then I began my google search. I found a lot of solutions but none worked. I was already passing database login information from code, it was as if it was ignored.
What solved this for me was to change the connection from odbc to ado, all of the methods were the same, but, this time no login prompt. Yah!!!