It is important to prepare Azure VM for Capture by running sysprep tool. In order to make Windows Azure VM to be exported as an image, it needs to be sysprep'ed. Sysprep tool can be found under system32\sysprep folder. Sysprep tool prepares VM for hardware independence and cleanup. In order to start up this program on Azure VM you want to Capture as you standard image you need to do several steps.

Step 1: Log in to the Azure VM operating system.

Step 2: Run CMD tool as an administrator.

Step 3: Change the directory to %windir%\system32\sysprep

Step 4: Run sysprep.exe

Step 5: Select "Enter System Out-of-Box Experience (OOBE)" for System Clean up Action and make sure "Generalized" check box is checked.

Finally, set Shutdown Options to "Shutdown" and press OK button. This final step will kick start Sysprep process which takes several minutes depending on your VM size. You will see Processing generalized phase Sysprep plugins... status with the progress bar. This is an indication that tool is running. After tool runs its course, your VM will get disconnected and go into shutdown mode. You will be able to see your Azure VM as shutdown using https://manage.windowsazure.com account. Again, wait a little before you see status in Azure Windows as Shutdown.