This May I finally completed something I've been on for last 2.5 years - I'm finally holding a burgundy-red German passport with my name and picture in it!
NOTE: This post got a lot of attention, and I keep getting questions about how to get German passport. I'm not a lawyer, and the laws and rules change frequently, so the current process is probably different from what I experienced. The best and the most straightforward thing to do is to just call the Einburgerungsamt and ask them directly.
Left: Temporary passport which I got the same day as the certificate of naturalization. Right: Germany allows having several passports to circumvent certain travel restrictions.
I learned that I could be qualified for naturalization in Germany from my alma mater's alumni magazine where one of our alumni said that the years you spend in Germany as a student (on a student residence permit) fully count towards citizenship. I was so surprised, since before I only knew about US immigration where the time you spend on student visa doesn't count towards anything. Also, naturalization and residence permits in Germany are done by completely different entities, and therefore it's a different set of laws!
I then had to complete German language requirements (level B2 for me, since I wanted to qualify for a fast-track naturalization through special integration), and also pass the citizenship test. The citizenship test was honestly a joke - I expected to learn much more about German history and culture, but I passed it with full points even without speaking good German.
Ideally I wanted to keep my Azerbaijani citizenship because, well, why should something I have be taken away from me? It may also take around a year to renounce it, and since I wanted to move to US, my goal was to get German passport as soon as possible. Besides, dealing with Azerbaijani authorities wasn't exactly something I was very excited about, and I also wasn't excited about having to get a tourist visa every time I visit Azerbaijan (visa-on-arrival in Azerbaijan was canceled in 2010).
Things however aren't ideal. All my attempts to convince German authorities to let me have dual citizenship failed badly (thank you Roland Koch), and I had to renounce my Azerbaijani nationality. Having had some other issues, I ended up being stateless for half a year.
Overall, I understood that I had to be pushy and it was solely my job to ensure that the process was moving forward. Cases sometimes get lost or forgotten, and just being in waiting rooms I've witnessed many cases where authorities did not respond for as long as a year. Also the letter confirming that I don't have the Azerbaijani citizenship anymore was lost in the mail, and I wouldn't find out about it if I didn't have a habit of calling the embassy every now and then to inquire about my case.
Benefits I have? Well, now I can live and work in any EU country, and I have much less travel restrictions compared to Azerbaijani passport. I can travel to 181 countries visa-free, and as someone who loves traveling this gives me a travel-gasm. I got a 5-year F1 visa for US, instead of 1-year one given to Azerbaijanis. I also got lucky that starting starting 1st September 2014 there's a visa facilitation agreement between Azerbaijan and EU, so having family in Azerbaijan, I get free one-year visas.
Whether it was worth all the trouble, especially considering that I live in US now? I don't know. But I'm proud that I did not give up and got through this.