When I ADD>NEW ITEM>DATA>SQL SERVER DATABASE, I get an error saying "Conections require SQL server 2005 express to function properly - check installation or download from..."
When I started the book, I completely uninstalled SQL 2005, and installed Express 2008. When I open the SQL Server management studio, all is running fine. I even created the NerdDinner database from the management studio, but cannot figure out how to simply connect to it. Any ideas?

Open up your VS, click on the View->Server Solution, and right click on the database object, then right click and select "Modify Connection" to change your settings.