Alter default message presented to user on failed login attempt
You can set your own custom message according to the validation by adding your custom validation function with login form.

function custom_module_form_alter(&amp;$form, &amp;$form_state, $form_id) {
  if($form_id == 'user_login_block' || $form_id == 'user_login')
    $form['#validate'] = array('custom_module_login_validate', 'user_login_authenticate_validate');
}
function custom_module_login_validate($form, &amp;$form_state) {
  $uid = _custom_module_is_user_exists($form_state['values']['name']);
  if(!$uid) {
    form_set_error('name','Username not found.');
  }
  else {
    if(!user_authenticate($form_state['values']['name'], $form_state['values']['pass'])) {
       form_set_error('pass','Incorrect password.');
    }
  }

}
/**
 * Query user table to check if such username is already exists.
 */
function _custom_module_is_user_exists($username) {
  return db_query("SELECT u.uid FROM {users} u WHERE LOWER(u.name) = LOWER(:username)", array(':username'=&gt;$username))-&gt;fetchField();
}