UPDATE: I am now converting one of my images which did not work prevously (gave invalid vmdk , please select another..)
I think it did not work before because it was an NTFS Compressed file (on a USB connected drive?) - when I copied it to my C:\temp (and thus it uncompressed it, then I seem to be able to convert - as long as I do not specify my ntfs compressed drive as the destination - if I do I get an exception (invalid memory overwrite or similar..) )
If you are having trouble, try moving the file to an uncompressed file (or uncheck NTFS compression on it.., and make sure the destination is not on a compressed drive..)
I think it is likely the issue (since I saw another thread regarding a problem with ntfs compression with the resize tool..