The Winsxs folder, stores multiple copies of dll's in order to let multiple applications run in Windows without any compatibility problem. If you browse inside, you will see what look like a lot of duplicate dlls, each having the same name. These are actually, different versions of the same files which are being stored; as different programs may require different versions. In short, Winsxs, which stands for 'Windows Side By Side', is Vista's native assembly cache. Libraries which are being by multiple applications are stored there. This feature was first introduced, in Windows ME and was considered as Microsoft's solution to the so-called 'dll hell' issues that plagued Windows 9x.

Again, as can be seen in the image below, in the Winsxs folder, the 'Other' File types takes the bulk of the space. These primarily consist of .imd, .ngr, .csd, .dll, .dll.mui, .exe and such other file types.

In Vista, there isn't a 'dllcache' folder and nor can you find the 'i386' folder, where the system caches (like in XP) all it's source modules. It is this WinSxS folder which stores the shared components of side-by-side applications. These files can be multiple versions of the same assembly or application. Every side-by-side assembly has a unique identity. One of the attributes of the assembly identity is its version. "Side-by-side assemblies are used by the operating system as fundamental units of naming, binding, versioning, deployment, and configuration. The Winsxs folder includes all manifests, optional components and 3rd party Win32 files".

As mentioned, Windows stores the old dll's and library components in the WinSxS folder. Now if a newer version of this file is a part of the OS, but a particular application requires a particular older version for running, then the older version from the winsxs folder will be used, leaving the newer version in its present place, for other applications which may require it.

So obviously you cannot delete this directory or move it elsewhere. Nor is it advisable to delete anything here, as such a step could probably make your applications un-workable or even break your system! If you have many applications installed, you can expect to have a jumbo sized winsxs folder.

The safest way to clean it, is by simply uninstalling applications which you don't require. However, this too is not fool proof, as many applications still leave behind their files here, since they may be shared between other applications. So the probability of dud unused dll's being left behind is quite high.

And if you are into trying out new software or installing and uninstalling frequently, you may notice that your winsxs size is indeed large, as Vista will store multiple copies of these dll files, in order to let multiple applications without compatibility problem.

Update 2 From E7 Blogs : “Modularizing” the operating system was an engineering goal in Windows Vista. This was to solve a number of issues in legacy Windows related to installation, servicing and reliability. The Windows SxS directory represents the “installation and servicing state” of all system components. But in reality it doesn’t actually consume as much disk space as it appears when using the built-in tools (DIR and Explorer) to measure disk space used. The fact that we make it tricky for you to know how much space is actually consumed in a directory is definitely a fair point!

In practice, nearly every file in the WinSxS directory is a “hard link” to the physical files elsewhere on the system—meaning that the files are not actually in this directory. For instance in the WinSxS there might be a file called advapi32.dll that takes up >700K however what’s being reported is a hard link to the actual file that lives in the Windows\System32, and it will be counted twice (or more) when simply looking at the individual directories from Windows Explorer.

The WinSxS directory also enables offline servicing, and makes Windows Vista “safe for imaging”. Prior to Windows Vista, inbox deployment support was through “Setup” only. IT professionals would install a single system, and then leverage any number of 3rd party tools to capture the installed state as a general image they then deployed to multiple systems. Windows wasn’t built to be “image aware”. This meant that greater than 80% of systems were deployed and serviced using a technology that wasn’t supported natively, and required IT departments to create custom solutions to deploy and manage Windows effectively. In addition, state stored in the WinSxS directory can be queried “offline”, meaning the image doesn’t have to be booted or running, and patches can be applied to it. These two features of WinSxS give great flexibility and cost reductions to IT departments who deploy Windows Vista, making it easier to create and then service standard corporate images offline.

There have been several blogs and even some “underground” tools that tell you it’s ok to delete the WinSxS directory, and it’s certainly true that after installation, you can remove it from the system and it will appear that the system boots and runs fine. But as described above, this is a very bad practice, as you’re removing the ability to reliably service, all operating system components and the ability to update or configure optional components on your system. Windows Vista only supports the WinSxS directory on the physical drive in its originally installed location. The risks far outweigh the gains removing it or relocating it from the system, given the data described above.