You need to provide more detail/s on exactly what you're doing and then what is happening - ie you're connecting from Excel to AS2K8 how? Using the From OTher Sources option on the data tab? Using the Insert Pivot Table on the Insert tab?
Can't explain the 2nd part of what you're seeing, as I don't know what it is that you're doing. The first part, is likely caused by authentication failure. you can confirm this by running the profiler on the AS instance, you'll likely see a connection attempt from an Anonymous user.
It also sounds like you're entering/typing User/Pwd in the dialog/wizard - generally, you don't do this when in an intranet situation, your credentials are/will be passed across. This was mainly used when connecting to the dll exposed through IIS when in an Internet scenario.