After days of searching, I finally found a work-around.
I'm using a Mac with 10.7.5, not sure if this has anything to do with it, but figured it might help. I ended up downloading a program called "TarPit" which does gzip on a mac.
The work around is here - http://wordpress.org/support/topic/fail ... workaround
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If your .xml data import is failing try the following
(this method resolved this issue for me):
1) Download and Install 7zip.
2) Right click on your .XML file -> 7zip -> Add to Archive
3) Change the "Archive format" to gzip and hit "OK". You'll now see your file with a .gz extension on it.
4) Try to import/upload the file again (selecting the .gz you just created not the .xml file) and it should work.
The first 2 times I tried this method I actually hit another error. Step 2 of the import ended up going to a "404 not found" page on the front end. To get around this I had to bump up the following settings in my php.ini:
default_socket_timeout = 600
pfpro.defaulttimeout = 600
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