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I'm using ubuntu 12.04, the live usb version.

Soon virtual disk on live usb gets full, after apt-get update.

df -h / shows:

Filesystem  Size    Used Avail    Use%    Mounted on 
/cow        124M    124M     0    100%    /

How can I reduce disk usage on this live system?

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The startup disk creator allows you to make a USB drive with any amount of space you want allocated to the home filesystem. If you intend running Ubuntu regularly from a USB stick then burn the image to a fair sized stick and allow as much as you want to be used by Ubuntu. If you are using it that regularly, you might want to consider a hard-drive installation?

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