UPDATE 16Nov2012: Selective sync is now enabled. See: How do I choose the SkyDrive folders to sync with the desktop app?
When the SkyDrive app is installed a folder is created on your computer and all of the contents of your SkyDrive is downloaded to that folder. 
So the answer to the question, “does the SkyDrive desktop app use disk space”, is definitely yes. This folder is synchronized with SkyDrive.
So what is the advantage of having the SkyDrive app?
The most important advantage is that with the SkyDrive app you can manage your SkyDrive like any other folder on your computer. You can add and remove files, add and remove folders and subfolders. You can copy files and folders with sub-folders and all their contents to SkyDrive with the normal drag-and-drop or copy-and-paste routines that you are familiar with.
Another advantage is that all your SkyDrive contents is available even when you are not connected to the Internet. When a connection is reestablished SkyDrive is automatically synchronized.
If you have multiple computers, all of them can be up to date and have your SkyDrive files available.
Where is the SkyDrive folder on the computer and how much space does it take?
The default location for the SkyDrive folder is C:\Users\YourName\SkyDrive. It is set during the SkyDrive app installation and another location can be selected. Note the Change button shown in the illustration here. The picture also shows where in Windows Explorer SkyDrive can be found: It is listed in the Favorites group.
Since the SkyDrive folder maintains a copy of everything in your SkyDrive the disk space will be the same as the online SkyDrive space. If you have 5 GB of files in SkyDrive, this folder will need 5 GB.
Where do I get the SkyDrive app?
Go to your online Microsoft account, go to SkyDrive. At the bottom of the listings in the navigation area on the left, click on Get SkyDrive apps. This will take you through the download and installation procedure.
How do I know when the files are up-to-date?
Open the SkyDrive folder. While a folder is being synchronized there will be a little double-arrow symbol next to it. 
When it is up to date, there is a checkmark in a green circle. While processing changes, you can also see a progress bar under the little SkyDrive icon in the notification area (right end of taskbar). Move the pointer to the symbol to get a screentip message of the status.
.:.
© 2012 Ludwig Keck
Ask Ludwig 
What cloud services store your data without eating HD.space? I want to upload the data because I don’t want to store all my old crap on my SSHD. Ihave a 1 TB EXTERNAL HD but don’t want to have to tote it everywhere. Box.com? Am I right in that dropbox doesn’t eat up local HD space?
If you do not install the SkyDrive app then files in your SkyDrive are not replicated on your computer. SkyDrive is not as easily managed this way. Dropbox works the same way, files are on both the computer and “up in the cloud”. However, Dropbox has a “Selective Sync” feature that allows you to store folders in the cloud that are not duplicated on your computer. This feature is also expected to be provided in SkyDrive soon. I do not know how Box.com compares.
Hi, I am trying to understand a few aspects of the desktop app before I install and have asked without response yet. Of course I still might not use the program untill folder selection is available anyway … but I like skydrive and currently manually save most documents each time there is a version change.
First) I am concerned about folder location. If I have to drop all the folders I want synced into the skydrive folder – is it then possible to have a shortcut to folder on my desktop or where ever else I might prefer to navigate to in using it? for example i keep a folder labeled school on my desktop. I want to access it from my desktop not by navigating to the skydrive folder – some one compared this to putting all of your clothes in a large box in the basement as opposed to neatly filed in various drawers of your dresser.
Second) I am concered about security – since there is no versioning if my computer crashes I lose everything? or if my laptop is lost or stolen and wiped – then again I lose everything? This is unacceptable and i can’t imagine anyone using the service under these circumstances. I must just not understand how it works. (of course I don’t put anything extrememly sensitive online – but all my documents are things that i want a reasonable degree of certainty that will be retained from moment to moment.)
You certainly can have a shortcut on your desktop to a folder or sub-folder from your SkyDrive folder. Open the SkyDrive folder, right-click the folder of interest, select “Send to” then “Desktop (create shortcut)”. This will work just fine.
Anything moved or copied to a SkyDrive folder will stay in that folder. In addition a copy is sent up “into the cloud” – so a copy resides in your online SkyDrive. The SkyDrive files are backed up and copied to at least two servers somewhere. If you have another computer also with the SkyDrive desktop app, the files are copied down to that computer as well. There is still the possibility of loss, so do not think of SkyDrive as a backup device, you should still back up your data separately.
You said that you “… have asked without response yet”. As of the time I write this response, I have not received an inquiry from you via “Ask Ludwig”. Perhaps it has gone astray “in the clouds”. If you do not get a response from me in a few days, please ask again. I do my best to answer are inquiries by email within two or three days.
See here
http://www.ghacks.net/2012/04/24/how-to-add-external-folders-to-skydrive/ for a solution.
I have the same problem/question – how do I NOT keep older files on my notebook hard drive.
Simply DELETE the Skydrive App, AND in future, when I want to get a file into the cloud, go to skydrive.com and click UPLOAD?
Thanks
Selective sync is now available on SkyDrive. See my post: How do I choose the SkyDrive folders to sync with the desktop app?
Thank you for your quick response. This helped me reclaim precious notebook hard drive capacity
I’ve been using the Sky Drive App for a while now and its been taking up too much space on my laptop. If I delete the App from my laptop, will it delete my files in the cloud that were in the skydrive folder?
You can delete the app, what you have in OneDrive (the new name for SkyDrive) will stay there and will not be affected. You can also decide what to sync – right-click the OneDrive icon in the notification area on the taskbar and select “Settings”. This way you can limit the extra storage on your laptop and still have the convenience of the app.