You are missing the GDR2 download and install when you install it you will see SQL Server 2005 and 2000 for development but at the point of connection VS2008 still shows only 2008 you have to manually remove 2008 before you will see 2005 in the drop down if you have 2005 running. It just takes some helping.

http://www.microsoft.com/downloads/details.aspx?FamilyID=bb3ad767-5f69-4db9-b1c9-8f55759846ed&displaylang=en