I think that they were talking about the actual written material from the modules and sourcebooks that are electronically published by WotC.
As long as your conversion does not include descriptions, flavor text, maps, and other material taken from the original books and only updates the rules to 3rd edition, I don't see what the problem would be. After all, WotC still owns the rights to ALL the material that was published throughout the years, including (of course) material that it has reproduced electronically as PDF files for sale and for free on their site. And WotC hasn't complained at all about the conversions that have been done at here at ENWorld, and they certainly know about it.
So, finish your conversion! Post it! I would think that they would be happy to see a 3E conversion, since it means more people would be open to buying the ESD....