Solved! Go to Solution.
Two suggestions:
1. This will probably work if you take the spaces out of your path names.
2. Alternatively, you can load the ascii file directly as a raster if you first change the extension to .asc. ArcGIS will recognize it as a raster file. When you're importing it, you have the option to specify projection. Then, use the copy raster tool or right click and use data -> export if you want to change the format.