Windows Azure automatically divides your role instances into some “logical” domains called upgrade domains. During upgrade, Azure is updating these domains one by one. This is a by design behavior to avoid nasty situations. Some of the last feature additions and enhancements on the platform was the ability to notify your role instances in case of “environment” changes, like adding or removing being most common. In such case, all your roles get a notification of this change. Imagine if you had 50 or 60 role instances, getting notified all at once and start doing various actions to react to this change. It will be a complete disaster for your service.

The way to address this problem is upgrade domains. During upgrade Windows Azure updates them one by one and only the associated role instances to a specific domain get notified of the changes taking place. Only a small number of your role instances will get notified, react and the rest will remain intact providing a seamless upgrade experience and no service disruption or downtime.

http://www.kefalidis.me/archive/2009/11/27/windows-azure-ndash-what-is-an-upgrade-domain.aspx

Lokesh, M