A few weeks ago I followed the official training of Microsoft Dynamics CRM 4.0. Always nice to see if there are things you don't know yet.
There were some discussions about named instances of MS SQL Server 2005 and MS Dynamics CRM 4.0. In the original Microsoft training material it was mentioned that this wasn't supported?! Guess what it is supported and it works fine.
After some research I also found a posting on Menno's blog about this topic.
Some basic information about Named Instances of MS SQL Server 2005
...Client applications connect to an instance of Microsoft SQL Server 2005 to work with a SQL Server database. Each SQL Server instance is made up of a distinct set of services that can have unique settings. The directory structure, registry structure, and service name all reflect the specific instance name you identify during setup.
An instance is either the default, unnamed instance, or it is a named instance. When SQL Server 2005 is in installed in the default instance, it does not require a client to specify the name of the instance to make a connection. The client only has to know the server name...
Why use it?
For example in hosted environment or on shared MS SQL Server (cluster). You can install more instances and each instance is connected to one application like Sharepoint, MS CRM 4.0 etc. It's also possible with multi-tenancy that each organization's database is located on it's own instance. The main reasons for using are security, maintenance and performance.