I know that this is very old but I had this issue and was Googleing around and found it. so for anyone else with this issue.
I had to the exact same issue and the solution is to install the SQL 2000 Client Tools. Only place I found them was on the SQL 2000 server install CD, select server install then custom then you can just choose the tools and not the entire server install.
I just selected the SQL Client Connectivity piece but that resolved my issue.
I had tried SQL 2005 and SQL 2008 but they did not work. FYI SQL 2008 server is installed on the machine that crystal 8.5 is on and it did not work.