ok so this is getting weird.
I tried to run imagew.exe manually and it just runs imagew v2. it looks like what used to be \ldmain\osd\imaging\imagew.exe was replaced with imagew v2. None of my .img images are recognized and it will only accept those that are .tbi.
Can I just rename the .img to .tbi? I'm going to try that anyway but this is still weird....
EDIT: I guess you can't- I get an error: The file is not a valid image file (13).
Well I restored the original imagew.exe from backup because it appears as though it was overwritten with imagew v2.
Everything works now.
So for anyone upgrading to SP1 that uses imagew V1 for their images, make sure you backup that exe because I think SP1 overwrote mine with a newer version that doesn't work with older images in .img format.
Your right it does over write imagew.exe file and stores it in a backup folder during the upgrade process. Thanks for the info it resolved our problem to.