Problem adding data connection in C#

I create my local database from within Visual Studio this way (Its different but may trigger something for you)
1) Create a new project
2) In "Solution Explorer" Right-Click on your project and choose Add > New Item (Or from the menu Project > Add New Item)
3) Choose SQL Database, and name it what you want. Click the Add button
4) When the "Data Source Configuration" wizard pops up, just click cancel. You wont need that yet...
5) On the menu go to View > Other Windows > Database Explorer.
Expand the tree for the visual representation of your db.
6) Right click on the "Tables" folder to add the tables that you want. (Once you have you tables you can right click on them to "Show table data" if you want to manually add some data)
7) Once you get all of your tables, right click on the "Database Diagrams" and choose Add New Diagram. (Answer yes if it asks you to create files) - Select the tables that you want in your diagram and then you can set all of your relationships here...
8) once your done with the diagram - you can go to your data sources to "Add new data source"... it should default to the db item that you added to the project... Now you can do the wizard for the dataset...
Note: This creates the db in the root folder of the project. If you select the db in Solution Explorer and view the properties on it, You'll notice that the "Copy to output directory" is set to "Copy Always"... you'll want to keep that in mind (I usually set mine to Copy if newer)
The thing to remember is: if your editing the db from within visual studio (add tables, relationships, adding data) your working on the db in the root... If you run your program, then your working on the db in the output directory....