When working with the Azure services, the Development Storage is configured to use SQL Express by default (looks for an SQLExpress instance name). If you want to use another instance (e.g. the full SQL Server), do the following:
1. Open the Azure command prompt by navigating to Start->All Programs->Windows Azure SDK (march 2009 preview) and select the Command Prompt shortcut.
2. Type dsinit /sqlInstance:name where name is the SQL instance name (use . for the default instance). This should initialize the storage fabric on this instance. If this fails – just repeat it, it should work.