Yes, this works. If you want to remove that Windows.old folder from Drive C: of your Windows Vista installation.
Go to Start > All Programs > Accessories > System Tools > Disk Cleanup.
In "Which files to clean up" dialog > Click on "Files from all users on this computer".
Select the Drive where your Windows.old is.
In Disk Cleanup dialog, select Previous Windows installation(s) in the "Files to delete" list. Click on OK.
This should clean up above 2 GB of hard disk space occupied by the Windows.old folder.
I checked this on Vista x64.
Ddas, I followed all the step you posted but couldn't see the "...Previous Windows installation(s) in the 'Files to delete' list" as you've mentioned. I'm using Vista Home - does this make any difference? Thanks!