Here's how it works today: you create your VHD in Hyper-V locally, and then upload the image, which is subsequently used to expand and scale the VM role. It is difficult to predict the actual size of the VHD, as it largely depends on what you install on your virtual machine. I'm sure you can easily create images above 10+ GB.
Once you upload your image, you do not need to re-download the entire image if, say, you fix your virtual machine. You can load a differential disk, which will be significantly smaller.
One thing to keep in mind: any changes you make to the VM at run time in Windows Azure will be unstable. For example, if a VM crashes and needs to be rebuilt, it will be restored from your originally loaded VHD.
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VM, VM VM, Windows Azure.