Q: Is SQL-DMO still supported with SQL Server 2005?
A: Yes, SQL-DMO will be fully supported (albeit officially deprecated), however it will not be able to make use of any new SQL Server 2005 features. SQL-DMO will be available through a special 'backward compatibility redist' (filename = SQLServer2005_BC.msi) that will contain various other components besides SQL-DMO. Just to clarify: if you do not update SQL-DMO (7.0 or 2000) then you cannot connect to SQL Server 2005. The DMO Redist can be downloaded here:

Q: When I connect to SQL Server 2005 with SQL-DMO I receive the following message: "To connect to this server you must use SQL Server Management Studio or SQL Server Management Objects (SMO).". What causes this?
A: You may be running an older CTP. Try the June CTP (or a later version if that's already available). It may also be the case that your client has not SQL-DMO installed. Also if SQL Server 2000 or an ISV application is installed it may overwrite the DMO registration. In that case you need to reregister the SQL Server 2005 DMO version (using regsvr32).