unable to login to SQL server (maybe has to do with SQL Server deficiency mentioned above (?)
If you installed SQL Server Express then you may have forgotten to provide the instance name which by default is SQLEXPRESS.
MYCOMPUTERNAME\SQLEXPRESS
Despite that problem, if I cancel I am able to enter VS2005 (!).
Yes, but StrataFrame will not operate properly without having a connection to the StrataFrame database. You should have provided this when you installed StrataFrame...if the StrataFrame database is not installed then you really need to go through the SF install again and make sure the StrataFrame databases are deployed.
What do you mean by "add references through the .NET tab (rather than having to browse for them)"?
When StrataFrame is installed you can choose an SF reference just as though you would a standard .NET reference.