I have uncovered this problem before and this time I thought I would spend the time to crack it. When running the Storage Emulator from the Azure SDK or running DSINIT.exe for the first time it needs to initialise; part of this involves creating a new database. This was not running correctly due to a permissions problem which stated "Cannot create database 'DevelopmentStorageDb20110816' : CREATE DATABASE permission denied in database 'master'".
The full report is as follows:
Added reservation for http://127.0.0.1:10000/ in user account MSFT-123\MyUser.
Added reservation for http://127.0.0.1:10001/ in user account MSFT-123\MyUser.
Added reservation for http://127.0.0.1:10002/ in user account MSFT-123\MyUser.
Creating database DevelopmentStorageDb20110816...
Cannot create database 'DevelopmentStorageDb20110816' : CREATE DATABASE permission denied in database 'master'.
One or more initialization actions have failed. Resolve these errors before attempting to run the storage emulator again. These errors can occur if SQL Server was installed by someone other than the current user. Please refer to http://go.microsoft.com/fwlink/?LinkID=205140 for more details.
The user this program is running as must be a sa with full permissions on the database. If this is not the case you can either change the user or GRANT permissions to the current user.
To change the user run the Windows Azure SDK Command Prompt (as administrator) and type 'DSINIT /?'. This will give you details on how to change user, which is to use the /user: argument.
Alternatively you could GRANT the permissions to your default user like so:
GRANT CREATE DATABASE TO "MYDOMAIN\MyUser"
Either of these solutions should solve your permissions problem with DSINIT.
Cannot GRANT permissions
Unfortunately my problems went further than this still. I believe this is to do with how many times I had installed a SQL Server Express in the past. How irritating is that?! You own the machine and yet you don't seem to have the permissions that reflect that!
Anyway, the solution to make this work once again was (unfortunately) to uninstall SQL Server Express and reinstall it again. This way you will be the owner of the SQL Server Express database engine and you will be able to create all the databases you wish, including your long awaited Storage Emulator database.
A better way to regain admin access
A better way to regain admin access was pointed out to me by a colleague, Michael Coates. You can either solve this loss of administrator on a SQL server by following this troubleshooting guide from MSDN (this worked for one commenter). Or you can run a batch script that will magically do it for you (this didn't work for one commenter). I have not done either of these so take this advice at your own risk. Remember, my way was to delete and reinstall the server so this cannot be more risky, surely?