Instead of using create/stage utility network, try using the Asset Package to geodatabase tool (for convenience). Instead of outputting the data to a mapped drive or network location, try outputting it to a local drive instead.
Did you ever find out what was causing this error, or did you use one of the workarounds suggested below? I am wondering because I have run the "Stage Utility Network" tool successfully several times in the past, but now that I've upgraded to 3.5, I get the error you noted. Please let me know if you found out anything. In the meantime, I'm going to try the Asset Package to Geodatabase tool, but it seems odd that the other tool used to work. Thanks.
