SQLExpress 2008 and VS2010

I can create a Database Connection from VS 2010 Server Explorer but unable to create a database in App_Data folder (using add new item).  I receive a Warning Dialog Box stating:

"Connections to SQL Server database files (.mdf) require SQL Server 2005 Express  or SQL Server 2008 Express to be installed and running on the local computer......" and tells me where to download SSE.

SQLExpress 2008 r2 is running on local computer (Network Services account).  SSE configuration has the SharedMemory, TCP/IP and NamedPipes all enabled.   I should mention that SSE was installed befored VS2010.

Appreciate any help,

Thanks.