By default, the Azure Storage Emulator expects you to have SQL Express installed on your development machine. If you have a full version (e.g. SQL Server 2008 R2 developer edition), starting an Azure project that uses Azure storage will fail with the following error message:

Windows Azure Tools: Failed to initialize Windows Azure storage emulator. Unable to start Development Storage. Failed to start Development Storage: the SQL Server instance ‘localhost\SQLExpress’ could not be found. Please configure the SQL Server instance for Development Storage using the ‘DSInit’ utility in the Windows Azure SDK.

I like error messages that actually point towards the solution. So, to resolve, open the Windows Azure SDK command prompt (in the start menu) or navigate to C:\Program Files\Windows Azure SDK\v1.4\bin\devstore\. In order to force DSInit to use another database, use the following:

dsinit /sqlInstance:. /forceCreate

It is possible that you get the following error message:

Cannot create database 'developmentStorageDb20090919': a network-related or instance-specific error occurred while establishing a connection to SQL Server.

If this happens, fire up the SQL Server Configuration Manager, go to Network Configuration and enable the TCP/IP protocol for your local SQL Server and restart SQL Server.