There was time I thought that the Framework version and the C# version are the same things, so once you install the next Framework version on the computer, you should use it
In the past Visual Studio 2005 was fixed only to one .Net version and C# compiler delivered with this version. In case you want use newer version of VS you have to switch Visual Studio as well. Now Visual studio can target to more than one .Net version and it can even mix new C# compiler with old .Net framework (lambdas or extension methods in .Net 2.0). Simply C# compiler version is related to C# language version.
You can check your compiler version in project file (open it as xml) and there is ToolsVersion attribute of Project element.
In my specific project there is ToolsVersion="4.0" and my target project is .Net 2.0. It means I can use new language construct in old framework which is not possible in VS2005.