If I remember correctly this is not a SQL Server problem but rather VS2008 needs help to see SQL Server 2005 even when both are in the same box. So here is what you do in SQL Server 2008 and 2005 make sure remote connection is allowed, both TCP/IP and Named Pipes enabled. Then both Windows and SQL authentication enabled and the browser service turned on, and SQL Server 2005 registered with SQL Server 2008. Then manually create and configure a connection it will bring up SQL Server 2008 manually remove it and you will see SQL Server 2005 under that connection add it and test you connection.