I recently installed Visual Studio 2010 and SQL Server 2012 on a Windows Server 2008 R2 machine - (including all updates/Service Packs).
When attempting to work on a
Maybe get SQL Server Data Tools, which work with SQL Server 2012? I believe there are some good tutorials and other materials in the Developer Training Kit. I don't think there are any tricks yet to make an older version of Visual Studio / Data Dude compatible with SQL Server 2012.
This error could also occur if you use the wrong provider. A recently came across the "This server version is not supported...." error and after changing the provider from sqlClient Data Provider to SQL Server Native Client 11.0 in the connection string for the Data Source configuration the problem was solved.
For me, the error arises whenever I try creating a new database. So after unsuccessfully attempting all methods advised, I bypassed the error by clicking on "Add connection" and putting my server name in the dialog box. After adding the non-existent database name, it notifies that it can't find such database and asks whether to create it. Voila! Database created (even though server version is supposedly unsupported).
I tried reinstalling the SSDT as well, but kept getting the same error you mentioned Jed, this seemed to let me get around the error message:
http://forums.asp.net/t/1721552.aspx/1?Working+with+Denali+SQLEXPRESS+in+VS+11+Database+issue
My problem was that I couldn't get VS2012 to work right with SQL Server 2012. I installed the latter product first, but after installing VS2012 and attempting to open an existing project, my existing data file just would not work. I know the software is supposed to automatically take you through a wizard to update your database in the project, but that didn't happen, and I couldn't find a way to make it happen. I'm on the point now of getting rid of SQL Server 2012 and going back to 2008. I'd rather use the most current releases, but I can't spend any more time on configuration issues.
Following MSDN blog link discusses about the issue that you are facing with local SQL Server database instance in Visual Studio 2010.
Using LocalDB in Visual Studio 2010