Pete - As long as you have a good backup of your database (primarily) and Moodle Storage (secondarily) I would certainly go with option 1. Take what you have and upgrade it. Most of the problems have been with 3rd party plugins like questionnaire, feedback, and other modules or blocks. As long as you have the 1.8 version of those modules or blocks you should not experience too much trouble. I would give it a shot on your test server (with production data) and see what happens. Let me know if you run into difficulty. Peace - Anthony
Backup and restore
Backup 1.6.5 and restore to new upgarded 1.8.2 server.
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