In-Place upgrade of 2008 R2 SP1 server to 2012 - 0x80070490

I'm trying to upgrade one of our fileservers to 2012 from 2008 R2 SP1. It already failed once and I was
forced to rollback to the previous version of Windows. Now, when I try I am continually getting the "Windows Setup cannot find a location to store temporary installation files. To install Windows, make sure that a partition on your boot disk has at least
1198 megabytes of free space".
The C drive has 55GB free, D drive 78GB free and E drive 255GB free.
I've tried running the setup from the command line and using the /tempdrive:<drive> switch to specify
the location the setup should place the temporary installation files but, no matter which drive I choose, I get the same error.
The only other partition is the System Reserved partition which has less than the required space.  I
had a look inside this partition (by adding a drive letter to it on a temporary basis) and there is a $WINDOWS.~BT folder which contains the temporary installation files.
Is it safe to run a disk cleanup on the system reserved partition as I suspect that might allow the setup to run?

Hi,
You can perform a disk cleanup check first to see if any temp file will be listed. By default it will only list Recycle Bin in Disk Cleanup result. 
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