Error when using VMware converter and sysprep with windows XP SP3

Ok. Here is the issue. I've searched several solutions and haven't been able to figure out the problem.

We are running ESXi 4.1 and I'm using the VMware vCenter converter version 4.2.0. I have sysprep setup for Windows XP SP3 (all our XP installs are 32bit). I'm properly able to start the vmware converter and take an image from a workstation to one of our ESXI 4.1 servers. I have the station name changed, join the PC to a workgroup and not the domain.  I have the Datastore set at the DAS which has over 1.5 TB free. The Virtual machine version is Version 7.0.

I change the Data to Copy section and go to advanced. I select destination layout, choose thin not flat and select the capacity to 42 GB (min is 32GB).  I leave the Processors and memory settings alone. I leave the Disk Controller at Preserve source (The HD on the station is a Sata HD).

Under Advanced options I install the vmware tools on destination machine, and select customize guest preferences for the virtual machine.

For the Guest preferences i change the Computer Name to SharedPC1. The owner I put Property of and Organiztion is NET. I also select generate new ID (SID). The workgourp I put in TEST and change the time zone to -6:00 for central time.

After the converter runs (without errors) I turn on the new VM. I see a login screen and login to the local admin account. Sysprep loads, I enter in a CD key, Sysprep configures the TEST workgroup and the TCP/IP settings.

Then after the restart I get this message:

Windows could not start because of an error in the software. Please report this problem as: load needed DLLs for Kernel. Please contact your support person to report this problem.

I've done a lot of digging on this and tried these steps.

http://support.microsoft.com/kb/164448

http://www.computing.net/answers/windows-xp/load-needed-dlls-for-kernel/133655.html

http://communities.vmware.com/message/995368

I've even tried to do a 2nd import of the Windows XP machine thinking maybe the 1st one didn't work properly and I still get the same error that is in the bold above.

These are the steps I followed for setting up the sysprep. I"m guessing that something with the sysprep is causing the issue because the VM loads fine until after the sysprep.

http://vmetc.com/2009/08/18/how-to-add-sysprep-to-vmware-vcenter-for-vm-customizations-vmware-converter-also/

http://kb.vmware.com/selfservice/microsites/search.do?language=en_US&cmd=displayKC&externalId=1014791

http://kb.vmware.com/selfservice/microsites/search.do?cmd=displayKC&docType=kc&externalId=1005593&sliceId=1&docTypeID=DT_KB_1_1&dialogID=31097134&stateId=0%200%2031095900

Any assistance would be greatly appreciated.

Thanks,