I installed mine with MSDE, so I didn't have this problem. But this looks
suspiciously like the problem we had in SBS, when the Office Extender Wizard
would popup whenever one booted the server saying that it had detected an
un-extended web site and would you like to do that now. Then, it would take all
the information about what database name where, and then refuse to create the
database because the UID/Password was incorrect. People would feed it all known
User Name/Passwords and it would refuse all. Turned out it was looking for a
SQL-type UID/password, and not an NT4 User Name/Password combination. You might
try the default UID/Password for SQL and see if it accepts that.
There is not a SBS2003 product yet because they still have to deal with the
problem of not being able to run it on a domain controller.