We recently upgraded to VC 2.5, it seems that cloning an XP or server 2003 template won't check the 1.1 folder as mentioned previously and as worked previously in VC 2.0, like others it seems so we're in the same boat.
I've put the 03 SP1 sysprep in the svr2003 folder, which allows us now to clone from 03 templates just fine however we still can't clone XP. Tried putting the sysprep 1.1 in the specific XP folder as well as the 03 SP1 sysprep files in the XP folder, all didn't work.
Just felt like throwing that out to save your time trying it.
Waiting for the fix...