I will suggest two steps:
1)On Web.Config make sure you update the connection string as shown below:
<add name="LocalSqlServer" connectionString="Data Source=NR2005;Initial Catalog=TheBeerHouse;Integrated Security=True"
I am using SQL 2005 enterprise edition and I have a named server (NR2005).
2) SQL 2005 doesn't allow remote access by default. http://www.datamasker.com/SSE2005_NetworkCfg.htm
has a very good explanation on how to configure SQL 2005 to allow remote connections.
I had the same problem and these steps solved the problem.