Have you tried setting the security mode from windows authentication to SQL Server AND Windows authentication? If I am not mistaken, MSDE installs using Windows authentication by default, but you can change this using other tools since MSDE does not include client utilities.
I am not sure if you can set this up in the MSDE installer's INI file (just like what you would do if you install MSDE as a non-default instance).
Bernard L. Omiple
VFP, SQL Server, Crystal Reports