SQL Server 2008 R2 Express password overwrite
As stated in the comments to your question SQL Server will not revert a password back to the previous one used. I believe the problem you are having is that your application has the sa password stored somewhere that it needs to be saved to. That is likely why you are receiving the error regarding login credentials. I would suggest checking the documentation for your application (if it is COTS) to see where the password for the SQL Login is set at.

If the application is a Windows Service you will likely find the password set in some configuration file or registry key. I would hope not in plain text, but no product is perfect. If you find the password is not in plain text (garbled or unreadable) this would indicate that the application has some configuration API (GUI or command-line/CLI) that needs to be used to set that password so the application stores it where it needs to see it.