I looked a little more and found that many people have run into this problem with various DBMSs so I am pretty sure it's not a problem with SQL Server. There were a few items in the newsgroups when I searched via Google for "SQL-08S01" but most of them were either a post of the problem with no replies or not in English (French and German I think).

I am thinking this is a problem with ODBC or the network. There is a slim chance that there might be a problem with the server-side network configuration either at the ODBC layer or lower. Has your network admin checked the links between the two computers including monitoring for network saturation? I am kind of grasping at straws but I really think it's network related; either a problem or security issue of some sort.

Sorry we haven't figured this out yet!