I created a new login using Express Management Studio and SQL Server authentication. On create, the password changes to some long format automatically and I am not able to connect using the newly created user with the password I have set.
What do I have to do to let it use the same password that I set and not tamper with it ?
I think Frosco's comment is spot on. Sql Server is not changing the password that you entered, but SQL Server Management Studio (SSMS) is visually modifying the password and confirm password entry boxes to make it appear that the password is longer than what it is.
Have you tried creating the new SQL account, exiting SSMS and reconnecting to the SQL Server instance through SSMS using the newly created SQL Account & password? If this works then you know that you created the account properly and that the password is in fact correct.
As Frosco also said, if you are unable to connect to the SQL Server database remotely it most likely is due to the fact that SQL Server Express is not configured out of the box to accept remote connections.
This KB Article describes the steps you would take to enable remote connections. It is written towards SQL Server 2005, but I believe the same basic steps apply to SQL Server 2008.
http://support.microsoft.com/default.aspx?scid=kb;EN-US;914277