When I was planning to install Windows Azure I had SQL Server 2008 installed and I didn't want SQL Express, so I decided to make it work.

Here is what I had to do.

Install Windows Azure SDK and all other components.

Development Storage Setup for SQL 2008:

Go to: C:\Program Files\Windows Azure SDK\v1.0\bin

Change the configuration file for the Development Fabric DevelopmentStorage.exe.config

Change the connectionString setting from:

  <connectionStrings>
    <add name="DevelopmentStorageDbConnectionString"
         connectionString="Data Source=.\SQLEXPRESS;Initial Catalog=DevelopmentStorageDb;Integrated Security=True"
         providerName="System.Data.SqlClient" />
  </connectionStrings>

To

  <connectionStrings>
    <add name="DevelopmentStorageDbConnectionString"
         connectionString="Data Source=localhost\SQL2008;Initial Catalog=DevelopmentStorageDb;Integrated Security=True"
         providerName="System.Data.SqlClient" />
  </connectionStrings>

Also change the developmentStorageConfiguration

  <developmentStorageConfig>
    <services>
      <service name="Blob"
               url="http://127.0.0.1:10000/"/>
      <service name="Queue"
               url="http://127.0.0.1:10001/"/>
      <service name="Table"
               url="http://127.0.0.1:10002/"
                     dbServer=".\SQLExpress"/>

To

  <developmentStorageConfig>
    <services>
      <service name="Blob"
               url="http://127.0.0.1:10000/"/>
      <service name="Queue"
               url="http://127.0.0.1:10001/"/>
      <service name="Table"
               url="http://127.0.0.1:10002/"
                     dbServer="localhost\SQL2008"/>

One more file to change would be the DeveGen.exe.config

from

<?xml version="1.0" encoding="utf-8" ?>
<configuration>
  <appSettings>
    <add key="DefaultSQLInstance" value=".\SQLExpress"/>
  </appSettings>
</configuration>

to

<?xml version="1.0" encoding="utf-8" ?>
<configuration>
  <appSettings>
    <add key="DefaultSQLInstance" value="localhost\SQL2008"/>
  </appSettings>
</configuration>

Save the files, and restart your Development Storage.

Good luck

Deylo Woo