When (Situation): I received this error while connecting to Sql Server 2000 using Sql authentication (windows authentication works fine) from asp.net 1.1 application. The Sql Server exists on my local system and it had a database, which I was trying to access.
What (Solution):
1) Open Enterprise Manager
2) Expand Microsoft Sql Servers and then SqlServer Group
3) Right click on the server, which you are trying to access from your application, select Properties
4) Select "Security" tab, select "SQL Server and Windows" and click OK.
5) When it prompts you for restart, click OK.
Links:
http://support.microsoft.com/kb/889615
