Physical-to-virtual conversion failed at 60%

I have two test machines setup as virtual hosts.

machine1: Microsoft Windows Server 2008 R2 Enterprise with Hyper-V
machine2: Microsoft Hyper-V Server 2008 R2

machine1 has System Center VMM 2008 R2 installed on it.

Both machines are identical with Intel Core2 Duo E8400 processors and VT is
enabled on the bios.

I was able to convert two XP desktops (P2V) to location at machine1.
When I was trying to do P2V of Windows 2008 Server (1G memory) to location
at machine2, I am getting the following error at step 1.4 "Make operating
system virtualizable" (note, there is no vm created at machine2 yet.):

Error (12700)
VMM cannot complete the Hyper-V operation on the uc1002.prod.sec.local
server because of the error: 'machine2' failed to modify device 'Microsoft
Virtual Machine Memory'.

In some cases, I see this warning messages as well:
Warning (10628)
The specified memory size for the virtual machine is not valid because of
virtualization software restrictions on the host machine2. Virtual Machine
Manager will set the virtual machine's memory to 1024 MB.

Please advise.

Thanks.