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The reason the option to keep your files, settings, and apps is greyed out during your setup attempt is due to a strict edition mismatch between your current operating system and the upgrade media you are using. Your VM is currently running Windows Server 2022 Datacenter: Azure Edition, which is a specialized SKU engineered specifically for Azure integration features like Hotpatching, whereas the upgrade disk you attached is built from a standard Windows Server 2025 Datacenter image. The Windows Setup engine actively blocks retaining applications and settings when cross-upgrading between these specialized cloud SKUs and standard editions to prevent corrupting core operating system components. Because Microsoft does not distribute downloadable ISO installation media for the "Azure Edition" to perform manual in-place upgrades, there is no supported way to force this mounted disk method without losing your applications. To move to Windows Server 2025 while keeping your infrastructure intact, you must perform a side-by-side migration by deploying a brand-new Windows Server 2025 VM, manually migrating your application workloads to the new OS, detaching and reattaching your existing data disks to the new machine, and finally reassigning your existing network interface or IP configuration over to the new VM within the Azure Portal.
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VPHAN