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As far as I know, it is not possible to connect with a 3.70 NAV Client to a SQL Server 2005, at all - I think the database compatibility mode is irrelevant ... but I never tested. As Nuno said, you need NAV 4.00 at least SP3(!) - or 5.00 with Hotfix 1. If you consider a technical upgrade, I would recommend...
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I said very clearly that SANs can be made to work, but only if the IT department has a good understanding of exactly how Navision Works. How SQl works, and how SANs work. My issue with SANs, is that I often see that the IT department builds a SAN puts in a nice RAID 10 array for the DB and a nice RAID...
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http://dynamicsuser.org/search/SearchResults.aspx?q=raid5&s=113
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You should never use RAID 5 on Navision. I know that from time to time there are some articles that say it will work, but there are none that recommend it.