hi, I don't know what OS you are using but my GNS3 is working with teraterm. Have you check the teraterm switches? I have these switches and they are the defaults:
C:\Program Files (x86)\teraterm\ttermpro.exe %h %p /W=%d /T=1
%h - device server
%p - device port
/W=%d - Window name = device hostname
/T=1 - telnet flag (1=enable telnet; 0=disable telnet)
BTW, I am using Windows 7, GNS3 0.7.1 and TeraTerm 4.66. Also, I think connection asking for username and password for Teraterm is thru SSH, are you trying to connect thru SSH or telnet?
Using TeraTerm in GNS3
I did have this set up once but one of my hard drives failed and i had to reinstall GNS3.
I have installed TeraTerm, and instructed GNS3 where the application is.
When i open a console, TeraTerm does start but it asks for a username and password.
This is bugging me as i have not set one up, and if i click either ok or cancel without entering anything then TeraTerm just closes.
When i first installed TeraTerm to work with GNS3 i never had this problem.
Anyone have a similar problem?