Your error is:
2013-03-15T08:41:38.362-05:00 [03548 warning 'Default'] Disk id fake-disk-from-vg(vg_dns1) does not identify an existing disk
2013-03-15T08:41:38.362-05:00 [03548 info 'Default'] found VolumesToClone list in TargetDiskParams
2013-03-15T08:41:38.362-05:00 [03548 warning 'Default'] Disk id fake-disk-from-vg(vg_dns1) does not identify an existing disk
2013-03-15T08:41:38.362-05:00 [03548 error 'Default'] VmTransformerImpl::SeparateBootDisk: Unable to find VirtualDisk for diskId=fake-disk-from-vg(vg_dns1)
2013-03-15T08:41:38.364-05:00 [03548 error 'Default'] TargetVmManagerImpl::CreateVM: Vm creation failed with error Invalid argument : VmTransformerImpl::SeparateBootDisk: Unable to find VirtualDisk for an active volume
I'm not sure that Converter supports LVM boot volume.