I have had similar problems running sysprep, especially when using an image created by rt7lite, I found the problem was that when you use rt7lite to strip items out it left registry entries In the case of sysprep, there are registry entries at HKLM\Software\Microsoft\Windows\CurrentVersion\Setup\Sysprep Which were looking for DLL files which were missing from the system. The workaround was to remove the entries, then sysprep worked.