SQL Server 2005 supports the capability to install multiple instances (or copies) of SQL Server 2005 or to install SQL Server 2005 alongside earlier versions of SQL Server on the same server. During the installation process, the DBA can choose to install an instance without a name—in which case, the instance name will take the name of the server—as a default instance. To install multiple instances of SQL Server besides the default instance on the same computer, the DBA must give the additional instances different names. Being able to install multiple instances of SQL Server lets you have system and user databases that are independent of each other. This capability not only lets you work with earlier versions of SQL Server already installed on your Computer but also lets you test development software and operate instances of SQL Server 2005 independently of each other.

SQL Server 2005 can support up to 50 instances when it’s not clustered, When SQL Server is clustered, and the maximum number of instances is 25

As to the maximum recommended number of instances, that is going to depend on the resources available on your server and the resources that each instance requires.