So wait, Iris-Spider, this is your log in page for the 1.2.3 version? If so then the reason you're having an issue is right here...
Code:
// Try to log the user in
$password = md5($password);
From what I understand they updated the security in the latest version. However if they didn't do those same updates in the register, log in, account page (where you change passwords) and password reset it's not going to work.
Best way I can think to explain it is when the account is made it's like the password was stored in Spanish, but the log in page is being told to read it as French. It will say the passwords don't match and refuse log in.