This behaviour is really strange. The Sitefinity converter should not depend on the project location, neither should the project depend on the Thumbs.db files.
Please, check if you have permissions for the user with which you are using Sitefinity. You can see the user's name on the project converter in the bottom left corner.
You can remove any Thumbs.db files from the project which you will convert. Maybe this was causing the problem. Have in mind that all the RadControls folder is replaced with the new version from Sitefinity2.7/RadControls folder when converting.
If still there is no positive progress it would be useful if you could send us your project along with the database. We will try to convert the project for you and to see what caused your problem.
Thanks in advance and we are looking forward to your reply.