Can I have a Windows.old folder inside of a Windows.old folder?

sure, just create it

If you're doing an upgrade of an upgrade: You should always assume an upgrade will fail. Anything you want to keep should be backed up before the upgrade. Don't count on Windows.old keeping it.

And in fact, it's probably best to copy any files you want to keep from windows.old to some other folder, and then nuke the windows.old folder. Otherwise it just sits there wasting HDD space.

I've never understood those Windows.Old folders. Every time I've ever upgraded Windows it's created one of those folder but I've never been able to access anything in them. I always get an corrupted error or a you don't permission to access these files error.

My last rig I couldn't even delete the folder.

This rig, was a fresh install of Windows so I don't have a Windows.old folder.

I didn't have that problem when I changed my mobo/CPU and had to reinstall Windows 7. I was able to access Windows.old just fine. I took what I wanted to keep from it, and deleted the rest.

ETA - I had a complete, up to date backup of my system on an external HDD as well. It turned out I didn't need it, but just in case I did, it was there.

When I reinstalled my OS a while back, I wasn't able to delete the windows.old folder because it still had the virus I was attempting to get rid of in it. Perhaps you met a similar fate?

You know, I never thought of that. That is entirely possible.

Go over to Majorgeeks and get a program that removes files despite Windows trying to keep them.