Actually, that Password Incorrect has been a problem since 1.1.2 and there is really nothing you can do about it. It is pretty random on some phones, and doesn't occur on others at all.
Allan -- FYI -- there is nothing Apple can do about it.
This message pops up if you have both your home (or laptop) computer on and are checking e-mail automatically on both the iPhone and your home computer every 5 or 15 minutes or so.
If you happen to check your eMail on your desktop, you will get a message that "maildrop is already locked" indicating your iPhone has already recieved the message. It takes a few minutes for the desktop to then check your eMail again.
If your desktop has just picked up the eMail within the last minute or so, you will get a "Password Incorrect" message on your iPhone - and then that is just instantly dismissed on the iPhone.
This seems to occur more for people using Macs than PC's - but it happens with both,
THere is nothing wrong with your phone. A reset will not change anything, nor will a restore.
Pretty much just ignore the message. If you don't want to see it at all, then don't check your eMail from both your computer and your iPhone at the same time. That will go away.