I have been down that road too. I have tried SQL Server and Windows Authentication. I used administrator for IIS and for the connection info for the ODBC System Datasource. I turned on auditing on the sql server for logging all logins and it appears to me that the request for the login never even happens so I don't think its a permissions issue on the sql server. I checked the permission on the access database and the folder that it is in. I have tried running it on Developer and Enterprise editions of sql server, professional and windows 2000 server, the web site on one machine and vice versa, the web server and sql server on the same machines. It wouldn’t surprise me if its something in SP3 or MDAC 2.7 which is on both of my development machines and the production machines.
If someone could tell me how to reverse MDAC perhaps I could track it back that way.