By the mid-1970s, Knopfler devoted much of his musical energies to his group, the Café Racers. His brother David moved to London, where he shared a flat with John Illsley, a guitarist who changed over to playing bass guitar. In April 1977, Mark moved out of his flat in Buckhurst Hill and moved in with David and John. The three began playing music together, and soon Mark invited John to join the Café Racers.
Dire Straits' first demos were recorded in three sessions in 1977, with David Knopfler as rhythm guitarist, John Illsley as bass guitarist, and Pick Withers as drummer. On 27 July 1977 they recorded the demo tapes of five songs: "Wild West End," "Sultans of Swing," "Down to the Waterline," "Sacred Loving" (a David Knopfler song), and "Water of Love." They later recorded "Southbound Again," "In the Gallery," and "Six Blade Knife" for BBC Radio London—and, finally, on 9 November, made demo tapes of "Setting Me Up," "Eastbound Train," and "Real Girl." Many of these songs reflect Knopfler's experiences in Newcastle, Leeds, and London, and were featured on their first album, the eponymous Dire Straits, which was released in the following year: "Down to the Waterline" recalled images of life in Newcastle; "In The Gallery" is a tribute to a Leeds sculptor and artist named Harry Phillips (father of Steve Phillips); and "Lions," "Wild West End," and "Eastbound Train" were all drawn from Knopfler's early days in the capital.