How are you running isqlw? As a command line utility or are you essentially "shelling out" to it so that the user can type commands?
If command-line, here's something from Books Online which you need to be aware of, since it sounds like the root of your problem:
quote:
The isqlw utility can be used with or without a user interface. To run isqlw without a user interface, specify valid login information (an instance of SQL Server 2000 with a trusted connection or a valid login ID and password) and input and output files. isqlw executes the contents of the input file and saves the results in the output file.
So far as switches go:
-E is for NT (trusted) authentication
-U <username> -P <password> is for SQL logins
K. Brian Kelley
bk@warpdrivedesign.org
http://www.sqlservercentral.com/columnists/bkelley/
K. Brian Kelley
@kbriankelley