Can' Start New Database From Web Matrix

I am running Web Matrix version 0.5, .Net version 1.1 on a computer with XP Pro.

 

Web Matrix works fine and returns forms properly.

I installed MSDE from the website (SQL2KDeskSP3a.exe)  I
believe that SQL Server IS running, because I see the tower icon with a
green arrow; when I double-click that I get a message that it is
running SQL Server.

 

When I click the "data" tab in Web Matrix I get the blank
workspace.  Then I click the New Connection icon at the top left,
which opens up a dialog box.  I change "Windows Authentication" to
"SQL Authentication."  That opens up the Username/Password
prompt.  I am entering "sa" for the username (I AM NOT SURE IF
THAT IS CORRECT) and "**secret**" for the password (that's what I
entered in the command prompt when I setup the MSDE).  Then I
click "Create a New Database."  I am asked to enter a name.

After a pause, I get an error message:  "Unable to connect to
the database server.  SQL Server does not exist or access denied.
Connection Open (Connect ( )).  OK

 

Do you have any ideas?