I've been meaning to post this for a while. Hopefully this helps you as much as it helped me.
A great source for learning the BDC is Sahil Mali blog at:
http://blah.winsmarts.com/2007-4-SharePoint_2007__BDC_-_The_Business_Data_Catalog.aspx
Sahil does a phenomenal job of walking you through a database app definition example.
Sahil's solution uses pass-through authentication. However, the SingleSignOn approach gives you a powerful alternative that can also take advantage of SQL Server connection pooling. Before you start on Sahil's fantastic example, you might want to configure your LobSystemInstance properties to use the SsoProvider in MOSS. For a succinct list of examples showing the authentication options, see: http://httpcode.com/blogs/PermaLink,guid,648659ca-a484-4df6-85bb-8a1ddeb03b8d.aspx
For a really great post on getting the SsoProvider in MOSS setup properly, see Michael Hofer - SharePoint Blog. If you are thinking of using Windows Credentials to make a connection to SQL Server, see the comment Michael posted on this blog on Aug 10, 2007.
Technically Speaking author, Ethan Wilansky