sysprep: compatibility issue

There is an incompatibility between this tool and the current operating system. Unable to continue.

Some times you will see the above error, when you try to run the SYSPREP utility on XP or W2003. It turns out that because the latest version of SysPrep can be used for either Windows XP or Windows Server 2003, it asks the Server service which operating system it is running on. If the server service is not running (e.g. if the File and Print Sharing for Microsoft Networks service is not installed), this fails.

make sure the SERVER services is running in services.msc.