Well, I'm having the same problem. The odd thing is though, is that it only happens for certain users (which are part of NT groups). Myself and many others whom are part of NT groups on this server, can connect without problem. Yet others, are having this problem. The only difference is that I have sysadmin, they do not. I have not yet tried a test case with a lower set of permissions but will do so tomorrow.
Curious though to as if this is really the only resolution thus far? I have seen many posts on this matter and I have seen this as a solution (to grant sysadmin) as well as the specific user is part of to many NT groups (not true).
I'm at a loss here. Never seen this. Unfortunately now I have to let some of these users/vendors use SQL security until I can resolve this.
* Just realized this is in SQL7/2000 forum ... I am on SQL2008/Windows2008. My gut is telling me it's something about UAC. Oh well, I'll leave this here for now and will re post where appropriate if no response is made.
Making SQL do what we want it to do.