well now, this is very strange.
and that's actually different than what I usually experience. Usually when holding the dpad up after the "rebooting your phone" step, you should come back into the bootloader, not into Recovery. So something is definitely not right there.
Ochilly - I know you said you're on Windows Vista 64 bit. I can't ascertain from your post - have you ever flashed with this computer before? Do you have access to try it from an XP machine?
How about you skylordusa1 - what is your setup? You described what software and such you installed, so I'm guessing that you've never flashed with this computer before since you had to install everything from scratch.
There's a part of me that would want to blame my new SBF, but I and a few of the Rescue Squad guys have tested the SBF on our phones (I've flashed it many times on all sorts of versions of Android -- 2.0.1, 2.1, 2.2, etc.) with no trouble, so I'm not going to go there yet. I'm going to see if I can duplicate your results, but I've got 32 bit XP here and it's never had any trouble flashing before.
One thing you share in common, other than that you're both using the new SBF, is that you're both "stock OTA 2.2". I assume that means you actually got FRG01B over the air, not that you applied the FRG01B SBF. I'll flash the ESE81 SBF onto my phone, and then apply the OTA update.zip so I've then got basically the same phone as you. One difference will be that your phone (Chilly) is Bootloader version 2c.7c whereas both of my phones are 2c.6c. I'm thinking that there's something there of interest.
I'll do some playing and get back with you guys. Let me know the answers to anything I've asked above if you see this in the mean time.