I think his suggestion might be to ensure that the user you are connecting with in ArcCatalog has been assigned to something like the db_datareader role within the database. Technically, a user account can exist and connect but have no permissions to see any records. So, you have a user login set up at the SQL Server instance level and there should be a corresponding user created within the database for that particular login. In SQL Server Studio Manager, if you can log in as an administrator or the 'sa' account then you can expand the database properties to see the Security section. Under the user in question, right click to see the properties and then ensure that it has been assigned to at least one role.
on a side note...please mention the version of ArcGIS being used for a better understanding (my guess, it's either 10.1 or 10.2....SQL Server 2005 is not supported with either).
Also, its preferable to have the SQL Server and the Native Client at the same version (2005 in your case)....
the database connection error still remains