Try running the following on your SQL Server instance:
SELECT @@VERSION
All being well then something like the following should be returned:
Microsoft SQL Server 2005 - 9.00.2153.00 (Intel X86) May 8 2006 22:41:28 Copyright (c) 1988-2005 Microsoft Corporation Standard Edition on Windows NT 5.2 (Build 3790: Service Pack 1)
If the version returned is 'Microsoft SQL Server 2000 etc...', and if you performed a side-by-side upgrade when you installed the 2005 instance, then you are probably inadvertedly using the old 2000 instance instead of the new 2005 instance - this would account for the problems you are experiencing.
Chris
This is on SQL 2005 Server That will be interesting
We restored our SQL2000 database files onto a newly installed SQL2005 Server, change compatibility modes in SSMS to 9.0 (from 8.0) no problem
Helps to list your environment, SQL version, SP1/SP2, blah blah...
It really sounds like you are running SQL Server 2000. If you did an in place upgrade from 2000 to 2005, the default instance gets upgraded to 2005. If you installed a named instance of 2005 on the same machine where 2000 was running, maybe you are accidently connecting the the default instance that is still running SQL Server 2000.
Running @@VERSION will settle the question. Also the version number of the SQL instance you are connected to will show up in SSMS. If you are in a query window, it will say something like 9.0 SP1 down at the bottom, or in Object Explorer it will say SQL Server 9.0.3042 (for 2005 SP2)