I would check out BlackBerryFAQ.com
Make sure you are not using a USB Hub and try to wipe using JL Cmdr
How do I wipe the BlackBerry using Jl Cmder? - BlackBerryFAQ
Try to use this version OS available from AT&T website if your wipe is successful
8700M_PBr4.2.1_rel155_PL2.3.0.79_A4.2.1.96_ATT.exe
and it looks like you are trying to update without using Desktop Manager. You might want to try using DM so that certain automations will happen. Don't forget to be patient and let it sit for 30-40 minutes while it re-initiates.
If none of this works, wait for one of the experts to answer. This forum has tons of resources that are priceless.