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Visual COBOL not connecting to Sybase

We are migrating Workbench 4.3 COBOL to Visual COBOL 2.3 using Native Project. The programs have been in production since 2001. We are using the Sybase precompiler COBSQL/COBPRE and have the database connection information in SQL.INI file.  I successfully tested connection to Sybase with ISQL command including a table selection. However VC does not seem to identify the use of SQL.INI for connection.

I am thinking this is a configuration issue. Any thoughts would be appreciated.

The program uses the following syntax. Host variables do get set properly.

           EXEC SQL
              CONNECT :CA-SYB-LOGIN-ID
                 USING :CA-SYB-SERVER-NM
           EXEC SQL
              DECLARE @DBNAME VARCHAR(32)
              USE @DBNAME

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