When using Navision (Dynamics NAV 5.0 or higher) with SQL 2005 (express or full) – you will receive a trace flag error, when trying to create a new database, unless you already has changed your SQL Server configuration.
So what to do when receiving this error? That’s simple – add the trace flag 
First go into your configuration manager. Usually it is located here:
Start
-> Programs
-> Microsoft SQL Server 2005
-> Configuration Tools
-> SQL Server Configuration Manager
Next go into properties for your SQL Server Instance:
- Select SQL Server 2005 Services
- In the right window, you will now see your SQL Server
- Right click on your server on select properties
Now all that is to do – is adding the trace flag
- In the open window select Advanced
- Find Startup Parameters
- Add -T 4616 to the end
Example:
-dc:\Programmer\Microsoft SQL Server\MSSQL.1\MSSQL\DATA\master.mdf;-ec:\Programmer\Microsoft SQL Server\MSSQL.1\MSSQL\LOG\ERRORLOG;-lc:\Programmer\Microsoft SQL Server\MSSQL.1\MSSQL\DATA\mastlog.ldf;-T 4616
Now select OK – restart you SQL Server Service, hereafter you will be able to create/use databases with Navision 