Hi Kevin,
Thanks for the reply.
The C:\Scratch DIR was created by me as the original error read the same but from a user temp directory.
I used the /ScratchDIR command to point it to the new C:\Scratch folder I created. I made sure that all the permissions are set on that DIR as per the MS article relating to DISM commands.
I still cannot get this to work and the only thing I have changed is install SP2.