Ok, so here is my update.
1. Could not update the existing Blog due to concerns of it breaking with such a drastic jump in versions and it needs to be online still for now. So, I downloaded all files including database and set it up on my other server. All went well, except for having to use bigDump to split the database as it was too large even though after zipping it was smaller than the max 50MB size.
Updated WordPress to the new version although version 3.8 was just released and with auto update that was my only choice. So now running version 3.8 with the old Blog, works fine. Exported all content using WordPress built in exporter. Tried to import into new site and it hangs just as before.
2. Tried exporting only posts, hoping a smaller file size will be better, and it also hangs on import just as before.
3. Tried using phpMyAdmin to import individual tables and did not have any luck with this option as well.
Wondering if manually entering all blog post content is going to be easier than trying to get it to import? I am really concerned about needing to reenter all the comments etc. Getting pretty disappointed at this point.
I will donate to any developer who can get a working importer doing what is suppose to do. Wish I had the programming chops to pull it off myself. Hint: there is money to be made here.
Urrrrgh! WordPress, please get this working!!