There are indeed compatibility issues with SQL Server 2005 on Windows 7. I believe that these were addressed in a service pack which is available through Windows Update.
With respect to the second part of your question, SQL Server 2005 does not ship with any graphical management tools, you can however download SQL Server Management Studio Express free from Microsoft.
A command-line environement is provided with SQL Server that will allow you to connect to the server and execute SQL statements.
To connect to SQL Server Express Edition instances, assuming the default instance name was used, you can type the following at a command prompt
sqlcmd -S .\SQLEXPRESS
If ths succeeds you will see the SQLCMD prompt which looks like
1)
From there you can execute any valid SQL statement, including this one which will create a database
CREATE DATABASE YourDatabaseName;
For the statement to have an effect,you also need to issue the GO
cimmand