(This is the post people are asking to have pinned to the top because is really helped them. So now the topic is pinned! --TNL)
Honestly, BioWare should have never tried to bundle MSSQL with the toolset. They should have just required that you install/configure it independently, as it makes a lot more sense that way IMO.
First, you want to uninstall everything and start fresh. That means uninstalling the toolset AND uninstalling everything that begins with "Microsoft SQL Server" (note, this step can theoretically botch other things, like if you have Microsoft Visual Studio C++ installed, but in 99% of cases people will NOT have anything else that depends on an MSSQL server install and it's almost guaranteed to have come from a prior toolset install [and uninstalling the toolset does NOT uninstall MSSQL server, even if that's how it got installed]; however, disclaimer provided, uninstall this at your own risk).
Second, install Microsoft SQL Server 2008 Express, which is a free download from MS. You can get it right here: http://www.microsoft...;displaylang=en. Scroll to the bottom where it has "Files in This Download" and select either the x86 or x64 option, depending on if you're running 64-bit or not. (You can also go to the more "fancy" official SQL express page, which is here: http://www.microsoft...press/Database/. However, that page will force you to download a stupid MS d/l manager in order to download SQL express, which is annoying).
Install Microsoft SQL Server 2008 Express with all the default options. As I recall you shouldn't have to change anything from the default. However, verify that the native client and management tools are selected for install; if not, check them to be installed too. It's possible you will be asked about the authentication modes to use; select "mixed" mode in that case. For the DB-specific admin user you should use a username of "sa" (the standard DB admin account name) and whatever password you want. You shouldn't ever have to use this account but it's convenient to have setup in case you have issues with the windows authentication modes.
NOTE: Depending on windows versions, you may get a warning about the SQL Express 2008 install having "compatibility" issues; just tell it to install anyway. This is a known issue and as long as you follow up by installing the SQL Express 2008 SP1, there are no problems.
Once finished, make sure you also install the SQL Express 2008 SP1. You should be able to get this most easily by just using Windows Update, or you can go straight to the microsoft download page for it: http://www.microsoft...;displaylang=en.
Once that is finished installing, fire up "Microsoft SQL Server Management Studio". If everything was default, you should be able to connect to the server name "localhost\SQLEXPRESS" using "Windows Authentication" and get connected with DB admin access to your local SQL Express install. If you get connected and can browse the system databases, etc., then your DB is setup and good to go. If you can't get connected with Windows Authentication, you can try the db mode authentication using the "sa" user you setup before. If you have other problems at this point, just search the web for help installing MSSQL Server Express 2008. As this is a widely used tool you should be able to find a ton of stuff about getting a standard default install running, completely unrelated to the dragon age toolset.
From within the MSSQL server management studio, expand your server node and right-click on "Databases". Select "New Database", and enter "bw_dragonage_content" for the "Database name". Click on "Options" and set the "Compatibility level" to "SQL Server 2005 (90)". Leave everything else at the default and click "OK". You should now have a new database under the databases node named "bw_dragonage_content".
Now download and install the DA:O toolset. During the install when it asks you about the DB, uncheck both "Install MSSQL Express 2005" and "Restore the default database.". Leave the radio option set to "Use default database settings". Finish the toolset install and exit.
Now back in the MSSQL server management studio, right click on the "bw_dragonage_content" DB you created earlier, and go to "Tasks->Restore->Database...". Under "Source for restore", select "From device:", and click the "..." button on that line. Set "Backup media" to "File", then click the "Add" button. Browse to your DA:O install path (i.e. C:\Program Files\BioWare\Dragon Age, or wherever you have it installed), then go to the "tools->dbbak" folder. Select the "bw_dragonage_content.bak" file, then hit "Ok", and then "Ok" again. This should add the DB backup set to the list window at the bottom. Put a checkmark in the box in the "Restore" column, then click "Ok". It will execute the restore to load the toolset data. Once finished, you should be able to see some tables under Databases->bw_dragonage_content->Tables, like "dbo.t_Area", etc. This means the toolset DB has been loaded properly. You can now exit the management console.
The last step is to tell the toolset how to find this DB. Navigate to your DA:O install directory, and under the tools\ subdir run the ConfigureToolset.exe program. Click "Next" on the first screen. On the "Content database" screen, uncheck "Use the default database", and then click on the "..." button next to the "Database" line. An advanced config screen pops up. Under 1., enter ".\SQLExpress" as the server name. Under 2., select "Use Windows NT Integrated security" (unless you had problems connecting with windows auth when firing up the SQL management studio, in which case you should instead tell it to use a specific username/password and then use the "sa" account you setup). Under 3. pick "Select the database on the server" and enter "bw_dragonage_content" in the box. At this point you should be able to hit "Test Connection" and get a popup that says the connection succeeded. Hit "OK" and you'll see a string in the Database field now. You should copy/paste this string into Notepad for the final steps, in case it's needed. Then hit "Next" and "Finish" to close this tool.
At this point you can try firing up the toolset and see if it connects to the DB OK. If you get no errors then everything is fine and you are done!
If you still get a DB connection error, then you'll need to to verify the registry key for the DB connection. In some windows/installs the registry key does not get set correctly for some reason. Run regedit.exe and go to the "HKEY_CURRENT_USER\SOFTWARE\BioWare\Dragon Age\Toolset\Environment" key. Look for the "DefaultDatabaseConnection" value. If it does not exist, right-click on the Environment key and select "New->String Value". Change the name of this new value to "DefaultDatabaseConnection", and set its value to the database string that you copied/pasted into notepad during the ConfigureToolset.exe setup.
Unfortunately, depending on your version of windows, the correct key location may be in a difference place; you may find it under HKEY_LOCAL_MACHINE\SOFTWARE\BioWare\..., or HKEY_LOCAL_MACHINE\SOFTWARE\Wow6432Node\BioWare\.... If you can't find it in those locations, do a search in regedit for "DragonAgeToolset", and check only "Keys" under Look at. This should ultimately locate the registry key location that the toolset on your machine is using.
Now run the toolset and it should find and connect to your local MSSQL Express DB.