Cool i figured it out. I noticed the file it wanted to update had a ".LWU" file extension i searched and found another .LWU file on the machine in the C:\Program Files\SCT\SCT Device Updater. This file appears older i think 7/11/2011 or something like that.
So i did the old style update holding the cancel button while i plugged it in and this time updated it using the older .LWU file.
It loaded fine. Then i ran the "scan for updates" again this time on the XP laptop and it found an updated firmware and it updated smooth this time.
Weird this time it did a "low level format" dont remember seing that before on previous firmware updates. Maybe because it was a bad update last time so it just wiped it clear and started over?
Im skeered now to hook it to my car and put the last tune file back in and brick my car.
Least i didnt have to call and bug SCT, just had to think about it a bit. Must of had a corrupt newer .LWU file or something?