Redmond (WA) – Microsoft is holding closed beta testing of its upcoming Windows Live Folders service that gives users 500 MB of online storage space. Using a desktop application, testers can upload files to the web service and then make the files viewable by groups of people or the entire Internet.

So far the 500 MB of storage doesn’t sound that exciting - and frankly sounds pretty stingy - because other services like Google’s Gmail offer almost six times the storage. However, Microsoft promises the capacity will increase once the testing period is over.

Users can only upload five files at a time which may seem like a pain in the rear, but this problem can easily be solved by zipping up the files before the upload.

Microsoft is also testing out Windows Live Photos which will compete with online photo services like Yahoo’s Flickr and Google’s Picassa web albums. The service is actually an extension of the photo gallery inside of Windows Vista, but it will also work with Windows XP. Like the other services, users can upload photos to the web and share them with other people. Microsoft hints that connectivity with Flickr could be possible – that is if Yahoo cooperates on the protocols.

With so many Windows Live applications popping up, it can be confusing as to what programs to install. Unlike Google or Yahoo, the Windows Live applications require a desktop-side application to be installed. So far each Live service has a separate install program, but Microsoft says a unified installer will be available soon.

Microsoft hasn’t announced when the Windows Live Folders or Live Photos services will exit the testing phase, but executives promise more details in August or September.