I agree. Actually I thought that's what you were going to try if you did another conversion.
I can't really say for sure what causes this error message because I can't find any information on it and why it happens. I doubt it is a regional setting because that would not affect the unicode status of any files.
It is possible that this message indicates a corrupted file. Considering the trouble you're having at getting the conversion off the source intially, it isn't reaching too far to conclude that it is a corruption issue. I've also seen sysprep failures that were related to OEM preparation and certain combinations of service pack levels or drivers.
What you can do is, convert with out customization and then perform the post-conversion customizations manually. Changing IP address and host name is done easliy. If you need to change the SID use NewSID. It's also possible to run sysprep, however it may fail again... create a snapshot point before trying it and don't forget to remove the snapshot if you are satisfied with the results.