Now with Windows Azure SQL Database as well as SQL Server inside a Windows Azure Virtual Machine an important question comes up, and that is, Which Relational Database Service should I use for my solution in Windows Azure?
In order to help answering this question I did a flowchart that should help. (this is a simplification of the process but should answer most of the questions)

What are the features that aren’t supported in SQL Database you might be asking. Here’s a list:
- SQL Server Utility
- SQL Server PowerShell Provider. PowerShell scripts can be run on an on-premise computer, however, and connect to Windows Azure SQL Database using supported objects (such as System Management Objects or Data-tier Applications Framework).
- Master Data Services
- Change Data Capture
- Data Auditing
- Data Compression
- Extension of spatial types and methods through Common Language Runtime (CLR)
- External Key Management / Extensible Key Management
- FILESTREAM Data
- Integrated Full-Text Search
- Large User-Defined Aggregates (UDAs)
- Large User-Defined Types (UDTs)
- Performance Data Collection (Data Collector)
- Policy-Based Management
- Resource Governor
- SQL Server Replication
- Transparent Data Encryption
- Common Language Runtime (CLR) and CLR User-Defined Types
- Database Mirroring
- Service Broker
- Table Partitioning
- Typed XML and XML indexing is not supported. The XML data type is supported by Windows Azure SQL Database.
- Backup and Restore
- Replication
- Extended Stored Procedures
- SQL Server Agent/Jobs
More about this Windows Azure SQL Database:
More about SQL Server inside a Windows Azure Virtual Machine:
Hope this helps you to make the right choice.