Solved part of the mystery with Visual Studio 2010 and Sql Server Express 2008 r2. Turns out VS 2010 comes with sql server express 2008 untilities and as such, relys on that to create database items within the VS2010 IDE. So if you install SQL Server Express 2008 r2 (as of today) you will lose the function to create database items under the VS2010 IDE.
And if you already have a full version SQL Express older than r2 then you need to run the installation as an "upgrade" otherwise you're going to mess up all version of SQL and the VS2010 IDE won't even be able to connect to a database. So running the "upgrade" fix my problems and allows my VS2010 apps to connect to database created under Sql Server Express 2008 r2. The VS2010 IDE also let me create new databases but not from the Add, NEW Item menu. I could only create a new database under the IDE from the Data Connection tool bar. Go figure. There still needs to be some sort of service pack from Microsoft to fix the bugs. But at least it works now! :-)
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