If you get a “failed to generate a SQL Server instance” on your Vista machine – try this first:
Go to the following folder “C:\Users\[user name]\AppData\Local\Microsoft\Microsoft SQL Server Data\SQLEXPRESS” and delete all the files. Restart your machine. I was able to add SQL Server 2008 databases to my Visual Studio project after that.
On XP machines – you need to delete the files in the following folder: “C:\Documents and Settings\[user name]\Local Settings\Application Data\Microsoft\Microsoft SQL Server Data\SQLEXPRESS”
note: More information based on SQL Server 2005 is available here: http://forums.microsoft.com/msdn/showpost.aspx?postid=98346&siteid=1