in a single task sequence USMT fails to collect and restore user data in in-place OS upgrade from Windows XP to Windows 7

I have a Task Sequence that is supposed to pickup user files, from Windows XP Pro, based on USMT and save them on the local disk, then install clean installation of Windows 7 Pro + some apps. Then restore USMT data.

I built a test Windows XP Pro VM, logged in with couple of domain accounts, created test files in each user account, then ran the TS. It installed Windows 7 Pro without reporting any issues. However, none of the settings or files from Windows XP transferred over.

I read smsts.log (you can download it here) and noticed that there were references to loadstate.log (see below), which in turn referenced scanstate.log (you candownload that here).

I am somewhat new to SCCM, therefore, any help with this analysis would be greatly appreciated.

2016-02-23 22:07:03, Info                  [0x000000] LOADSTATE.EXE Version 6.2.9200.16384[gle=0x000000b7]
2016-02-23 22:07:03, Info                  [0x000000] USMT Started at 2016/02/23:22:07:03.444
2016-02-23 22:07:03, Info                  [0x000000] Command line: C:\_SMSTaskSequence\Packages\P0100001\amd64\loadstate.exe C:\_SMSTaskSequence\UserState /ue:MININT-DUU396A\* /v:5 /c /hardlink /nocompress /l:C:\Windows\CCM\Logs\SMSTSLog\loadstate.log /progress:C:\Windows\CCM\Logs\SMSTSLog\loadstateprogress.log /i:C:\_SMSTaskSequence\Packages\P0100001\amd64\migdocs.xml /i:C:\_SMSTaskSequence\Packages\P0100001\amd64\migapp.xml2016-02-23 22:07:03, Status                [0x000000] Activity: 'MIGACTIVITY_COMMAND_LINE_PROCESSING'
2016-02-23 22:07:03, Info                  [0x000000] Drive C:\ has 20 MB free; a minimum of 250 MB is required[gle=0x000000cb]
2016-02-23 22:07:03, Info                  [0x000000] Failed.[gle=0x00000006]
2016-02-23 22:07:03, Info                  [0x000000]   A minimum of 250 MB of free space is required for temporary files[gle=0x00000006]
2016-02-23 22:07:03, Info                  [0x000000] USMT Completed at 2016/02/23:22:07:03.444[gle=0x00000006]2016-02-23 22:07:03, Info                  [0x000000] Entering MigShutdown method
2016-02-23 22:07:03, Info                  [0x000000] Leaving MigShutdown method
2016-02-23 22:07:03, Info                  [0x000000] ----------------------------------- USMT ERROR SUMMARY -----------------------------------[gle=0x00000006]
2016-02-23 22:07:03, Info                  [0x000000] * USMT error code 29: [gle=0x00000006]
2016-02-23 22:07:03, Info                  [0x000000] +-----------------------------------------------------------------------------------------[gle=0x00000006]
2016-02-23 22:07:03, Info                  [0x000000] | A minimum of 250 MB of free space is required for temporary files[gle=0x00000006]
2016-02-23 22:07:03, Info                  [0x000000] +-----------------------------------------------------------------------------------------[gle=0x00000006]