I typically don’t install SQL Server Express when I am installing Visual Studio 2008 since I run SQL Server 2008.
In order to setup the Windows Azure SDK without a default instance of SQL Server Express, you need to use the the DSInit command-line tool (dsinit.exe) to setup an Azure development storage environment.
This tool is run automatically the first time you launch development storage by running DevelopmentStorage.exe. Initializing development storage by running DevelopmentStorage.exe is the recommended approach, but you can also run DSini if you need to customize the install experience.
So in my case, I wanted to install the Azure development storage into my default (unnamed) instance of SQL Server 2008. I did so by running the following command: dsinit /sqllnstance
Once the command finishes, you should see the following: