Hi Doughy, yes the problem you are having I have come across on another install.
The quick fix to to download BartPE and make a boot CD from it. It lets you boot into WinXP from a CD and then run the Diags Upgrade from there. It will work fine that way.
BartPE is a utility to allow you to make a bootable CD, alll you need is a copy of WinXP for it to copy the CAB files from.
Let me know if this works, it has for me.