Crystal Delivery was developed and distributed with the XI controls. In the past when I recived the "Failed to open the connection error" it was due to a user/file DSN problem, not an issue with Crystal Delivery. But, that problem also would prevent the reports from opening in Crystal Reports. Can you view the reports in Crystal Reports?

When you preview the report in Crystal Reports, are you prompted for a password? If so, then you need to supply this password in the connection string you listed above.