I brought up a temp SQL 2000 server and configured it in the same way; and behold, same problem. After further investigation I found it was not SQL 2005, but the length of my password. I use a 64-char complex password for my service accounts and there is something that the 2.0.1 installer does not like about them. After reducing my password to 32-char, all is well again. This also explains why sa would not work either. Even though it is local, it is also a 64-char password.
I hope this helps someone else that uses long passwords.
This problem was not present in the 2.0.0 release. If you plan to upgrade to 2.0.1, shorten your passwords to 32-char or lower.