Since the beginning of Office 365 we have DirSync, which is a light FIM installation that is going to sync your users, groups and contacts to Windows Azure Directory.
In the first version we had only sync. After a while it was supported to do filtering on OU, domain & attribute. In June 2013 we receive the DirSync with password synchronization. But still DirSync had to be installed on a separate, domain joined server. It could not be installed on a Domain Controller.
Well, that issue has been solved too. In this new version you are allowed to install it on a Domain Controller at this time for ‘development purposes’, as also stated in the Best Practices of the Windows Azure Active Directory Sync Tool: http://social.technet.microsoft.com/wiki/contents/articles/17370.best-practices-for-deploying-and-managing-the-windows-azure-active-directory-sync-tool.aspx#A11
Download the new version on: http://go.microsoft.com/fwlink/?LinkID=278924