I ran across this fix when trying to sysprep a Windows 8 computer that was upgraded from Windows 7, for testing purposes. It was in fact a VMware template I converted to Hyper-V and was prepping for the VDI lab.

Issue: When I tried to run sysprep, I received a message from sysprep that upgraded images could not be generalized. Only clean installs were allowed

Workaround: Remove this registry key from the affected computer:

                 “HKLM\SYSTEM\setup\upgrade“

The next time you run sysprep, it should work as expected.