How do configure a trusted connection between IIS 7 and SQL Server 2005?

My webapp was working fine with Windows Authentication enabled in IIS. Now, in order to solve a problem, we need to use a trusted connection. Unfortunately, enabling the trusted connection in the web.config broke the webapp. Oddly enough, when I run this application with trusted connection from my local dev machine (using the Cassini web server)

IIS (Windows Server 2008) is running on one machine. The database (SQL Server 2005 but could migrate to 2008) is running on another machine. We are on a Windows domain running AD. All traffic is within our own firewall - no public access. Beyond that, I can't provide much info but I can find it. We're very "compartmentalized" (we have server people, security people, oracle people, SQL Server people, etc.)

Thanks!

Update 02/14/2012 0902: The webapp is now functional (app no longer broken) but the main issue is still unresolved.

Now I have the app's application pool running as a domain account with permissions on the SQL Server box and IIS box. We were using this account to run the application but, and here's the problem, we need to log the real user name that made a change. When using the service account, the name of that service account appeared in the audit tables, making the auditing quite useless. So, not I'm at least running again.

The connection string in the web.config is using "Trusted_Connection=True", the appPool is using a domain account with access to both boxes, BUT when I make a change (logged in as me) the name of the service account (appPool identity) is still logged in the audit tables.

I also manually granted full permissions to the service account on the webapp folder.

What do I need to do in order to log my name, not the service account, in the audit tables? Everything I'm reading says I need to establish a trusted connection between the two servers.