Simple and easiest way to solve this problem => Uninstall 64bit SQL server express and install 32bit version 
Otherwise, Congratulations on boldly accepting the challenge to stick with the native 64bit version of SQL Express in the face of this error.
Try the following link solutions, it should fix your problem and let you run native 64bit version of SQL Express.
http://www.devfish.net/fullblogitemview.aspx?blogid=657 (this one helped me fix my problem)
http://social.msdn.microsoft.com/Forums/en-US/sqlsetupandupgrade/thread/6503fe05-4d05-49e7-8c2a-b9778ab7e9b8
http://blogs.msdn.com/sqlexpress/archive/2008/10/02/faq-error-creating-a-service-based-database-in-visual-studio-2008-sp1.aspx
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