SQL Server 2005 supports VARBINARY(MAX) .
Either you execute this CREATE TABLE statement on a SQL Server 2000 machine, or your database is still at compatibility level = 80 (SQL Server 2000).
Check your compatibility level with this query:
SELECT name, compatibility_level
FROM master.sys.databases
WHERE name = 'yourdatabase'
If you get an error while executing this query, you are working with SQL Server 2000 :-)
80, 90 (SQL Server 2005):
ALTER DATABASE YourDatabase SET COMPATIBILITY_LEVEL = 90