The first day keynote was all about Windows Azure, a Services Platform for the cloud. But how does Live Mesh relate to Azure? The Live Mesh blog explains:

In his PDC keynote just now, Ray Ozzie announced the Azure Services Platform.  Here's the overview picture:

The Live Services box at left is home to the developer services and APIs that power the Live Mesh platform experience.  Think of it this way -- Live Services provide the infrastructure, Live Mesh is a software + services experience/app built on top of those services.

In short, Windows Azure is the base on which all is build! The bottom layer of the cake, the foundation.