System.Data.SqlClient.SqlException: Login Failed For User 'NT AUTHORITYANONYMOUS LOG

I have searched all the forums on this issue and tried the other options but nothing seems to work. I have an IIS server using asp.net to connect to a SQL database on a separate server which also happens to be a domain controller(i.e. no local accounts). I have tried changing the connection string, web.config, etc. but I still can't get connected. I believe the issue is with the SQL security but I'm not sure.

IIs is set up for Integrated Windows Auth.

Here is the web.config:

<?xml version="1.0" encoding="utf-8" ?>
<configuration>

<!-- application specific settings -->
<appSettings>
<add key="connectionString" value="Data Source=VGISQL2;Initial Catalog=PaymentApplication;Integrated Security=SSPI;" />
</appSettings>


<system.web>

<!-- DYNAMIC DEBUG COMPILATION
Set compilation debug="true" to enable ASPX debugging. Otherwise, setting this value to
false will improve runtime performance of this application.
Set compilation debug="true" to insert debugging symbols (.pdb information)
into the compiled page. Because this creates a larger file that executes
more slowly, you should set this value to true only when debugging and to
false at all other times. For more information, refer to the documentation about
debugging ASP.NET files.
-->
<compilation
defaultLanguage="c#"
debug="true"
/>

<!-- CUSTOM ERROR MESSAGES
Set customErrors mode="On" or "RemoteOnly" to enable custom error messages, "Off" to disable.
Add <error> tags for each of the errors you want to handle.

"On" Always display custom (friendly) messages.
"Off" Always display detailed ASP.NET error information.
"RemoteOnly" Display custom (friendly) messages only to users not running
on the local Web server. This setting is recommended for security purposes, so
that you do not display application detail information to remote clients.
-->
<customErrors
mode="Off"
/>

<!-- AUTHENTICATION
This section sets the authentication policies of the application. Possible modes are "Windows",
"Forms", "Passport" and "None"

"None" No authentication is performed.
"Windows" IIS performs authentication (Basic, Digest, or Integrated Windows) according to
its settings for the application. Anonymous access must be disabled in IIS.
"Forms" You provide a custom form (Web page) for users to enter their credentials, and then
you authenticate them in your application. A user credential token is stored in a cookie.
"Passport" Authentication is performed via a centralized authentication service provided
by Microsoft that offers a single logon and core profile services for member sites.
-->
<authentication mode="Windows" />

<!-- AUTHORIZATION
This section sets the authorization policies of the application. You can allow or deny access
to application resources by user or role. Wildcards: "*" mean everyone, "?" means anonymous
(unauthenticated) users.
-->

<authorization>
<allow users="*" /> <!-- Allow all users -->
<!-- <allow users="[comma separated list of users]"
roles="[comma separated list of roles]"/>
<deny users="[comma separated list of users]"
roles="[comma separated list of roles]"/>
-->
</authorization>

<!-- APPLICATION-LEVEL TRACE LOGGING
Application-level tracing enables trace log output for every page within an application.
Set trace enabled="true" to enable application trace logging. If pageOutput="true", the
trace information will be displayed at the bottom of each page. Otherwise, you can view the
application trace log by browsing the "trace.axd" page from your web application
root.
-->
<trace
enabled="true"
requestLimit="10"
pageOutput="false"
traceMode="SortByTime"
localOnly="false"
/>

<!-- SESSION STATE SETTINGS
By default ASP.NET uses cookies to identify which requests belong to a particular session.
If cookies are not available, a session can be tracked by adding a session identifier to the URL.
To disable cookies, set sessionState cookieless="true".
-->
<sessionState
mode="InProc"
stateConnectionString="tcpip=127.0.0.1:42424"
sqlConnectionString="data source=127.0.0.1;Trusted_Connection=yes"
cookieless="false"
timeout="20"
/>

<!-- GLOBALIZATION
This section sets the globalization settings of the application.
-->
<globalization
requestEncoding="utf-8"
responseEncoding="utf-8"
/>

<!-- ADDED BY YURI -->
<identity impersonate="true" />

</system.web>

</configuration>





HELP!!!!!!!!!!!!!!