I thought I would post about the stepped I just followed to get Dynamics NAV working under SQL 2005 all on the same machine

With help (thanks Ryan),  I found you need to change the startup options for SQL 2005,  so that NAV can run correctly.

You need to add the startup flag to SQL 2005 adding - -T 4616

This is done from SQL Server Configuration Manager -

Restart SQL Server for this change to be applied.

To get the windows integrated security working you need to copy the file xp_ndo.dll from the installation disc.     Note that this is a 32bit version.    A 64 bit version is available on partner source

Copy the file xp_ndo.dll to c:\Program Files\Microsoft SQL Server\MSSQL.1\MSSQL\Binn\xp_ndo.dll'

In SQL Server you need to run the following script

USE master
EXEC sp_addextendedproc xp_ndo_enumusergroups, 'C:\Program Files\Microsoft SQL Server\MSSQL.1\MSSQL\Binn\xp_ndo.dll'
GO
GRANT EXECUTE
ON [xp_ndo_enumusergroups]
TO PUBLIC
GO

USE master
EXEC sp_addextendedproc xp_ndo_enumusersids, 'C:\Program Files\Microsoft SQL Server\MSSQL.1\MSSQL\Binn\xp_ndo.dll'
GO
GRANT EXECUTE
ON [xp_ndo_enumusersids]
TO PUBLIC
GO

And that's about it.   Here's NAV 5.0 running.