In a traditional on-premise application, the application code and database are located in the same physical data center. SQL Azure and the Windows Azure platform offer many alternatives to that architecture. The following diagram demonstrates two generalized alternatives available for how your application can access data with SQL Azure.
In Scenario A on the left, your application code remains on the premises of your corporate data center, but the database resides in SQL Azure. Your application code uses client libraries to access your database(s) in SQL Azure. For more information about the client libraries that are available, see Guidelines and Limitations (SQL Azure Database). Regardless of the client library chosen, data is transferred using tabular data stream (TDS) over a secure sockets layer (SSL).
In Scenario B on the right, your application code is hosted in the Windows Azure and your database resides in SQL Azure. Your application can use the same client libraries to access your database(s) in SQL Azure as are available in Scenario A. There are many different types of applications that you can host in the Windows Azure platform.
The Scenario B client premises may represent an end user's Web browser that is used to access your Web application. The Scenario B client premises may also be a desktop or Silverlight application that uses the benefits of the Entity Data Model and the WCF Data Services client to access your data that is hosted in SQL Azure.
For more information about the SQL Azure architecture, see SQL Azure Architecture.
Cited from Microsoft's Site: http://msdn.microsoft.com/en-us/library/ee336239.aspx
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