Create system variable and user variable in your system environment variables :_CSRUN_STATE_DIRECTORY with value like 'C:\TempAzure' (without commas). DO NOT LEAVE A SLASH AT THE END like 'C:\TempAzure\'.
Follow this link and do it and refresh your environment vars because compute emulator will not get them until refreshed.
Is there a command to refresh environment variables from the command prompt in Windows?
This was the solution which worked for me.
A hint how I got it :
1. Start your event viewer and your azure sdk command prompt with elevated privileges ( as administrator )
2. type csrun /devfabric:start
3. Go to event viewer and hit F5 and look for the error from DFService.exe. There should be 2-3 new errors and the first should be from DFService. Look at the description - it should contain something like :
Application: DFService.exe
Framework Version: v4.0.30319
Description: The process was terminated due to an unhandled exception.
Exception Info: System.ArgumentException
Stack:
at System.IO.Path.CheckInvalidPathChars(System.String, Boolean)
at System.IO.Path.NormalizePath(System.String, Boolean, Int32, Boolean)
at System.IO.Path.GetFullPath(System.String)
at Microsoft.ServiceHosting.Tools.DevelopmentFabric.Program.Main(System.String[])
The last row flashes the red lamp :)