Login failed. The login is from an untrusted domain and cannot be used with Windows authentication

Question

In my virtual environment I have two servers. Both with MS Server 2008 R2 (STD) 64-bit. On one of these machines I have installed SQL-Server 2008 R2, and on the other I have an IIS 7.5.

The machines are not in any domain, runs under workergroup. I have developed a sample webbsite that "talks" with the SQL-Server and it wokrs fine. No problem what so ever.

But! When I run the commerce site I get the following error:

Login failed. The login is from an untrusted domain and cannot be used with Windows authentication.

This is what I don't understand? My connectionstring looks like this:

<add key="CatalogConnectionString" value="Data Source=XXX.XX.XXX.XXX;Initial Catalog=Site_productcatalog;User ID=YYYY;Password=xxxxx;" />

I've used the exact same user account in my sample site and that works! What could be the problem?

Satck trace:
[COMException (0x80004005): Login failed. The login is from an untrusted domain and cannot be used with Windows authentication.]
   ADODB.ConnectionClass.Open(String ConnectionString, String UserID, String Password, Int32 Options) +0
   SharedFns.ReadSQLDbLocale(String& strAdminConn) +148
   SharedFns.SQLGetConnStr() +132
   SharedFns.ReturnOpenConnection(Connection& connCfg) +76
   SharedFns.CheckAdminDatabaseVersion() +278
   SharedFns.ReturnOpenConnection(Connection& connCfg) +14
   Microsoft.CommerceServer.Interop.Configuration.SiteConfigReadOnlyFreeThreaded.SQLGetConnection() +20
   Microsoft.CommerceServer.Interop.Configuration.SiteConfigReadOnlyFreeThreaded.Initialize(String bstrSiteName) +396
   Microsoft.CommerceServer.Runtime.Configuration.CommerceResourceCollection..ctor(String siteName) +246
   Microsoft.CommerceServer.Runtime.CommerceApplicationModule.InitializeApplication() +283
   Microsoft.CommerceServer.Runtime.CommerceApplicationModule.Init(HttpApplication appInstance) +127
   System.Web.HttpApplication.InitModulesCommon() +124
   System.Web.HttpApplication.InitInternal(HttpContext context, HttpApplicationState state, MethodInfo[] handlers) +1162
   System.Web.HttpApplicationFactory.GetNormalApplicationInstance(HttpContext context) +312
   System.Web.HttpApplicationFactory.GetApplicationInstance(HttpContext context) +133
   System.Web.HttpRuntime.ProcessRequestInternal(HttpWorkerRequest wr) +196