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I want to upgrade my system from Windows 7 to Windows 8. However, I am currently using more than half of my disk space. I read that Windows will create a "Windows.old" folder with a full copy of your previous Windows installation. However, I am now already using at least 80% of my disk. Does the Windows.old folder copy over the files exactly, or does it leave some out? Are the files compressed?

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I believe the .old folder will be a copy of any files changed by the upgrade (which will be most)! I don't believe it's compressed. It's retained to allow you to go back to a previous version of Windows if required.

I don't know if this is the case for 7 to 8, but for Windows 10

Ten days after you upgrade to Windows 10, your previous version of Windows will be automatically deleted from your PC

Keep in mind that deleting your Windows.old folder, contains files that give you the option to go back to your previous version of Windows. Deleting your previous version of Windows can’t be undone.

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Windows.old allows you to return completely to your prior state, so it contains everything including your user profiles.

I have one here on a test machine and it is just under 20GB. It is not compressed. There is not much data or many apps installed on this test Windows Insider machine.

Typically on my productions machines the Windows.old file is near 30GB, so you need that kind of free space to update.

You might wish to upgrade to Windows 10 if you can (not Windows 8).

Before you start, make sure all your drivers are completely up to date. Use the computer manufacturer's Driver Update App. If you are short of space, you can move Documents from a known location to a USB Hard drive. Make sure you know how to restore them.