The Windows Azure compute emulator enables you to run, test, debug, and fine-tune your application before you deploy it as a hosted service to Windows Azure.
The Windows Azure compute emulator is a local emulator of Windows Azure, so that you can build and test your application before deploying it to the Windows Azure. Some differences exist between running an application in the compute emulator and running it as a hosted service in Windows Azure. The compute emulator does not fully emulate the behavior of the Windows Azure load balancer. You can attach a debugger to a role instance running in the compute emulator, not in windows azure.
The Windows Azure compute emulator requires that you run IIS 7.0 with ASP.NET, but not all of the role services of IIS 7.0 and not all of the features of Windows Server 2008 are installed by default. The services and features that are installed by default are a subset of the services and features that are installed in Windows Azure. Most basic services can run in the compute emulator; however, when creating more advanced services you may need to take additional measures to ensure that your service will behave in the same ways in the cloud as it does when running in the compute emulator.
Architecture of emulator in cloud development is drawn in the attached snap shot.