The user instance login flag is not supported on this version of SQL Server. The connection will be closed.

The issue is that User Instancing, which allows the automatic creation of databases from code, isn't support on the full version of SQL 2005. That is a function of SQL Express only. The solution is to manually create the database in SQL Server 2005 and set a connection string to point to it. You will also need to run aspnet_regsql.exe manually against the database if you will be using any of the new built-in database features of ASP.NET v2.0.

http://forums.asp.net/t/913172.aspx