>>Also are you sure that your SQL Server is installed to use both Windows authentication and SQL Server Authentication?

Just a couple of thoughts>>

To Simon,

You can check if you're using both authentication method by doing the ff.
1. Fire up enterprise manager program.
2. Expand the NODE Microsoft Sql Servers
3. Expand Sql Server Group
4. This should be your machine name, right click and select properties, then select security tab under the SQL Server properties.. if not mixed mode, then set to mixed mode authentication..