In this PDC2008 talk, Chuck Lenzmeier - the Architect in Azure team explains how the Virtual Images of OS works in the Azure cloud data centers. His Bio in PDC2008 says that Chuck has been with Microsoft since 1989, and worked on all versions of Windows from NT 3.1 to Vista. The below video really helps to understand how the Virtual Images are being managed to achieve Windows Azure manage while retaining absolute compatibility with existing OS, Software and Applications.

His co-speaker Frederick Smith from Microsoft explained the other aspects of Windows Azure.

• Windows Azure provisions and monitors hardware elements (Compute nodes, L2 Switches, LBs, Routers), hardware lifecycle management (burn in tests, diagnostics and repair, failed hardware are replaced) and capacity planning
• Azure Fabric is highly available: Network has redundancy built in, services deployed across fault domains, load balancers route traffic to active nodes only, Fabric Controller state check-pointed periodically, FC state is stored on multiple replicas
• PDC 2008 CTP release of Azure has Automated Service deployment, Three Service templates, change number of instances, simple service upgrade/degrade, Automated service failure discovery and recovery, external VIP Address/DNS name per service, Service network isolation enforcement & automated hardware management
• For 2009 release will have ability to model more complex application, richer life-cycle management & richer network management