First, run command prompt. Look at the screen that comes up. The directory that is displayed is where you MUST place the meshes to be converted to DX/UT.
The project directory is only the location that the files are exported to after completion of conversion. placing the files for convrting here only results in an "Item not found" error...
There is a picture explaining what im rambling on about enclosed.
I thought i'd post this cos i saw nothing else about it... Soz if this is already here, if it is, i'll go cry in a corner..

Edit: Yay! it's not just not useless, it's Stickeyd!

