SQL Server must be installed with Windows Authentication, and must be running under the Local System account.
Prerequisites for Microsoft SQL Server 2005
If you are creating a SQL Server 2005 database on a database server that is not on the same computer as the Application Object Server (AOS), configure the database server as follows:
Enable remote connections.
Open the SQL Server Management Studio (Start > All Programs > Microsoft SQL Server 2005 > SQL Server Management Studio), log in, then right-click the instance you want to connect to.
Click Properties, click Connections, and then select Allow remote connections to this server.
Enable named pipes.
Open the SQL Server Configuration Manager (Start > All Programs > Microsoft SQL Server 2005 > Configuration Tools > SQL Server Configuration Manager).
Expand SQL Server 2005 Network Configuration, select Protocols for MSSQLSERVER, right-click Named Pipes, and then click Enable.
If the SQL Server computer has a firewall running on it, be sure that port 1433 is open.
After making these changes, you must restart SQL Server.
You must log in with an account that is both:
A member of the Administrators group on the computer from which you are running Setup.
A member of the Database Creators server role in the SQL Server instance in which you want to create the database.
Set the following permissions in the database for the account to be used by the AOS:
User on the database server (already exists if you are installing on the same SQL Server as the first database).
Assign to the db_ddladmin, db_datareader, and db_datawriter database roles.
Grant the user execute rights on the createserversessions and createusersessions stored procedures.
If you are trying to connect to a database that was not created by Microsoft Dynamics AX Setup, the AOS account (the domain account or Network Service account associated with the AOS service) may not have appropriate rights in Microsoft SQL Server. The AOS account must be a user in the database, and be assigned to the following database roles db_ddladmin, db_datareader, and db_datawriter.