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The article Refresh and reset your PC mentions exactly what happens during the refresh and reset operations in Windows 8:

Refresh

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  1. The PC boots into Windows RE.
  2. Windows RE scans the hard drive for your data, settings, and apps, and puts them aside (on the same drive).
  3. Windows RE installs a fresh copy of Windows.
  4. Windows RE restores the data, settings, and apps it has set aside into the newly installed copy of Windows.
  5. The PC restarts into the newly installed copy of Windows.

Reset

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  1. The PC boots into the Windows Recovery Environment (Windows RE).
  2. Windows RE erases and formats the hard drive partitions on which Windows and personal data reside.
  3. Windows RE installs a fresh copy of Windows.
  4. The PC restarts into the newly installed copy of Windows.

It is my understanding that Windows RE (Recovery Environment) is included as part of the System Reserved partition created by default on the first hard disk. The size of this partition has gone up to 350 MB from the 100 MB it used to be in Vista/Windows 7, no doubt as a result of adding these features.

Now we have already discussed how to skip the creation of this System Reserved partition during Setup. Basically, the same techniques that used to work with Windows 7 work with Windows 8 as well. What I want to know is, what will be the exact repercussions of not having the System Reserved partition in place?

I assume Troubleshoot / Advanced options should still be available as before:

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But what about the Troubleshoot menu itself?

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Will the Refresh and Reset options disappear? Will they remain but be unavailable? Or possibly they will throw an error if selected? Also, will it be possible to access and successfully execute these options if installation media is available? Anything else that might be affected?

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Have you tested what will happens. This seems easy enough to verify what would happen. –  Ramhound Oct 30 '12 at 13:45
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Without the System Reserved partition everything remains the same, both Troubleshoot and its advanced options show the same options as when having it.

Essentially that's because either having that partition or not doesn't change the fact that Windows installation is successful, boot files are copied to the only partition there is instead of being copied to the reserved partition. The benefit of the reserved partition (or one of them, I don't know if there are more) is that it's not directly accessible to users so it's less probable that important files get corrupted or deleted.

In 2010 they explained what the partition was for in a TechNet blog post, and recently in this website; that partition is used to implement BitLocker (which in Windows 8 is available in Pro and Enterprise versions):

The partition has two main functions. First, it stores the Boot Manager code and the Boot Configuration Database. The second thing it does is store the startup files needed by BitLocker Drive Encryption. If you end up using BitLocker to encrypt your entire hard drive, you don’t have to repartition your system to enable it.

In Windows 7 the size reserved for it was 100MiB, in Windows 8 it was increased to 350MiB. I believe the main reason is that now the recovery image (WinRE, a small environment with tools to help diagnose and recover from errors) is stored there too, which is 191MiB. In Windows 7 it was 161MiB and resided in the main partition (system hidden directory named Recovery).


This is the actual process in a virtual machine without recovery partition:

Selecting to refresh the Windows installation works as expected: after selecting the option the computer will reboot and you'll be prompted to login as an user of that machine. Confirming you want to go on will start the process and begin refreshing, installing drivers, etc.

Refreshing...

After the process you'll be able to access the machine with your user, personal files will be there and there may be a file in the desktop containing information about programs that were installed before the process and are not there anymore. Also, any folder that may have been in the Program Files directory will be deleted too (e.g. programs installed manually without and actual installation programs); applications from the Store are installed automatically after refreshing though.

A similar process happens when choosing to reset, but you're not prompted to login since there will be no users in the new system. After the reboot you're presented with the choice of "fully cleaning" the whole drive, which I assume a series of data overwrites are performed to accomplish that:

Reset options All ready Resetting...

After the process you'll see the license agreement and you'll go through the first steps you had when installing Windows: preferences, setting up user name, ...

Note that both processes require you to insert a recovery media or Windows DVD, I don't know if that happens having the recovery partition but it's most likely it does; resetting for example erases everything so the original image inside the DVD needs to be applied again.

Recovery media or Windows installation disk are required

I think it's important to mention too that Windows activation is backed up and restored during any of the processes, whether Internet access is available or not (so people using the Enterprise evaluation won't be able to reset the trial period with this, although a reset isn't very different than a clean installation).

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I have a fairly good idea of how both processes work although I haven't tried myself yet. Did you actually attempt both operations without a System Reserved/Recovery partition? If both work as normal, I'd like to know just what the partition is for besides having the bootloader installed to it by default? Surely there must be some use for it? –  Karan Oct 30 '12 at 3:19
    
Yes, just finished, those screenshots are from the actual process performed in a VM without the system reserved partition. There's an actual use for it, I'll edit the answer with more info ;). –  Xandy Oct 30 '12 at 3:22
    
So without the partition BitLocker's whole drive encryption will be disabled? That's it? And BitLocker's what's taking up 250 MB extra over what it took in Win7? I'm not so sure... That article seems to be talking about the 100 MB version that Win7 creates. Do you have an equivalent source describing the Win8 version and its contents? –  Karan Oct 30 '12 at 3:37
    
The size increase is probably related to the recover image residing there in Windows 8. 100MiB were not enough to accommodate it in Windows 7 so only the boot files were stored there, plus BitLocker information if in use. In Windows 8 inside that partition there's the full recovery directory, the image itself is already 190MiB. –  Xandy Oct 30 '12 at 4:08
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Thanks for looking into it and a great answer! –  Karan Oct 30 '12 at 18:22
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