I cannot replicate this problem. I have tried with a file created in Excel 97 and opened and password protected in Excel 2003 (o/s Windows XP). Earlier today I tried using a copy of the same file, opened and protected in Excel 2000 (o/s Windows 2000). In all cases pressing Cancel just "does nothing".
Have you tried other workbooks to see if this also happens? If it is just the one file it is possible that the VBA modules are corrupt. You could try cleaning them click here - the Excel 97 version works with all versions of Excel from 97 to 2003.