I was having a problem flashing from an SD card too. In fact I had a new 2 Gig sandisk that i pulled out of the package when my main one didn't work. I tried everything to no avail.
After reading your post, I tried No2Chem's storage manager cab, as was suggested in the how-to flash sticky. It worked!
The tool can be downloaded here:
http://www.nuerom.com/BlogEngine/pag...geManager.aspx
I am very happy to have this issue fixed. I thought my phone was broken.