yes I tried in DFU mode.. no go. I will try another computer now..
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WOWWW! after 4 hours of trying to figure it out. i am finally running 4.2.1. Experiences like this really make me want to switch over to android.. anyway I read some tutorials that some people posted on tiny umbrellas faq pages and figured it out. For everyone who is having issues with this check this
Download TinyUmbrella (Fix Recovery) to Exit iOS 4.3 Recovery Mode Loop | Jaxov
ignore everything about 4.3. the process is exactly the same apparently. Download that zlib file from the link and download the recovery file. extract both and put the zlib file into the recovery folder. click fixrecovery421. this process took no more than 5 minutes. wanted to share the wealth.. goodluck