I recently installed the November release of the Azure SDK.

I created a sample Web Role application and tried to run it, but I got the below error:

“Windows Azure Tools: Failed to initialize the Development Storage service. 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.”

Under default configurations, the SDK will point your storage service into SQL Server express instance.
Well in my case I did not have Express, instead I had SQL Server 2008 Dev Edition.

So to resolve this, go to the “Windows Azure SDK Command Prompt” and run the following command:
DSInit /sqlInstance:. /forceCreate

This will create your storage database under the default instance. Of course you will have to supply the named instance in case you have one. For example:

DSInit /sqlInstance:MyNamedInstance