VMware: Underlying file system does not support files that large

CURRENT CONFIGURATION: Windows XP SP2, Western Digital External USB disk with NTFS file system, VMware converter 3.0.3 build-89816.

OBJECTIVE: Convert VMware images from External Disk to VMware ESX Server 3i Version 3.5.0 Build 123629.

ISSUE: DISKLIB-SPARSE: "E:\Clones\filename.vmdk" : failed to open (36872): Underlying file system does not support files that large;
diskLib.sparseMaxFileSizeCheck= "false" in *.vmx file doesn't help;
Convert for mapped network drive doesn't help.

SOLUTION:
Copy files to local disk (with NTFS file system).