We moved our developement databases from a server running sql 2005 to sql 2008.  When we try to setup a connection in the "Application Database Connections" from the StataFrame menu in vs, we select the new sql server but get a message "Invalid Server Connection - Could not authenticate the SQL server." when we click "Next".  We tried both integrated security as well as sql security.  We're able to connect to the new sql server via SQL Server Management Studio from the same workstation using either Integrated or SQL Security.  On a slightly side note, the Database dropdown that specifies the "StataFrame" database is never enabled.

Try SQL authentication...it is always hard to tell if Windows Auth is setup properly. Try logging in with SQL auth to see if you have better results.