You can't go directly to local host when running the web app as an azure web role because if you do it won't run in the context of the Windows Azure compute emulator. When you seet the startup project to the app, it ran it like you would any traditional
web app (either in IIS if you've configured your environment that way or in the debug IIS process using an oddball port). When you set the cloud service as your startup project, its going to package up your cloud service and deploy it into Windows Azure compute
emulator to mimic the environment it would be living in when you deploy it to Windows Azure.
I don't believe the problem is with the application as much as something about your environment. I still think it looks like some type of proxy that's blocking the traffic.
Something to check is that after you press-F5, open up the computer emulator UI and make sure you see your instance there and running. Right click on the little blue flag that should be in your tooltray and select the compute emulator IO option from the
context menu.