If you are NOT using ActiveDirectory, then ignore all of the other solutions above. The confusion stems from the new ApplicationPoolIdentity setting default in IIS 7.5 (MS keeps changing the identity mechianisms).
The error means the web application doesn't have access to your database. On Windows 7 / IIS 7, by default each application pool has its own user. It seems the idea is to improve security by restricting what that web application can do (in case it gets compromised and controlled from the outside).
You can change what user the application pool is running under but that will defeat its own purpose. A better way seems to give the pool's user the needed permissions (and not a bit more).
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