When you perform Windows Vista Custom Installation, it creates a folder called Windows.Old and it contains the folders and files that were used in the earlier edition of Windows.
It is safe to remove it unless you want some data from the previous installation. In my case, it seems that the provider actually built the laptop with Windows XP and later on our request installed Windows Vista which created the folder of Windows.Old.
Regarding best way to remove it, check out the Microsoft KB article How do I remove the Windows.old folder?
Open Disk Cleanup by clicking the Start button . In the search box, type Disk Cleanup, and then, in the list of results, click Disk Cleanup.
If you're prompted to choose a drive, click the drive you just installed Windows on, and then click OK.
In the Disk Cleanup dialog box, on the Disk Cleanup tab, click Clean up system files.
If you're again prompted to choose a drive, click the drive you just installed Windows on, and then click OK.
Select the Previous Windows installation(s) check box, and any other check boxes for the files you want to delete, and then click OK.
In the message that appears, click Delete Files.
Also, to know more about, specifically, restoring personal data from the previous installation, check out Microsoft KB Article 932912 at How to restore personal data