If you have the SQL Browser service enabled and the correct database installed (on any of the instances) the database tool window that pops up from the SDK will have the combo box populated with it, if not please try restarting the SDK Browser. If you press test connection and you don't have a database specified you will only test if the server is available.
You can always opt out from the database tool window but continue with the upgrade and run process. I will suggest that you try "Open in Visual Studio" and opt out of the window. In the end you will only need to modify your connection strings in order to make it work.
And what you have suggested is exactly what we have implemented, however it will be released either prior to Q2 or with it. I will notify you in this thread when the new SDK is released.
Still I see no need to wait for the Q2.
I hope this is helpful.
the Telerik team
Q1’11 SP1 of Telerik OpenAccess is available for download
; also available is the Q2'11 Roadmap
for Telerik OpenAccess ORM.