Resolution:
1)     Need to have  MS SQL Server – MS SQL Server 2000 Service Pack 3 or higher

    A.     Bring up SQL Server Enterprise Manager, right mouse click on (local) and bring up SQL Server Properties dialog.

    B.     Click General tab and make sure “Production version:” is 8.00.2039 (SP4) or something like that. If your version is 8.00.194 (RTM), then you will need to apply SP 4.

    Link for SP 4 -
        http://www.microsoft.com/downloads/details.aspx?FamilyID=8e2dfc8d-c20e-4446-99a9-b7f0213f8bc5&DisplayLang=en

    Download SQL2000-KB884525-SP4-x86-ENU.EXE and install SP 4. Please remember to stop your SQL server before applying the SP.

2)      DDJDBCAuth04.dll shared library –

   If TRA 5.5 is used then 'DDJDBCAuth04.dll' is avaialble under C:\tibco\tpcl\5.4\jdbc\lib directory.
   If an earlier version of TRA is used, then use the attached 'DDJDBCAuth04.dll'. Create 'lib' directoryC:\tibco\tpcl\5.4\jdbc directory and place it under it.

3)      JDBC Connection URL –

    Specify JDBC connection URL to use type2 authentication and the path to DDJDBCAuth04.dll shared library.
    Ex. “jdbc:tibcosoftwareinc:sqlserver://localhost:1433;databaseName=pubs;authenticationMethod=type2;loadLibraryPath=C:\\tibco\\tpcl\\5.4\\jdbc\lib”

4)      JDBC Connection shared resource –

    Leave both User and Password fields empty (i.e. blank).

5)      Make sure MS SQL Server is configured to support Windows authentication.

    A.     Bring up SQL Server Enterprise Manager, right mouse click on (local) and bring up SQL Server Properties dialog.

    B.     Click Security tab and make sure “Authentication:” is “SQL Server and Windows”.

You are now all set to connect to MS SQL Server using TIBCO driver with type2 Windows Authentication. For more details, please refer to C:\tibco\tpcl\5.4\jdbc\books\jdbc\Jdbcref\jdbcref.pdf, Chapter 6 The Microsoft SQL Server Driver, Authentication.

Please note that you need to use the TIBCO driver bundled in TRA 5.4 or later.

How do I connect to MS SQL Server using TIBCO driver with type2 Windows Authentication?