msmxml and lg USB drivers are necessary! reboot your pc after installing drivers!

Once that is sorted, open up KDZ_FW_UPD.exe (Windows Vista/7 users, make sure to right click and select RUN AS ADMINISTRATOR!)
Change the type of flash by selecting the 'Type' dropdown box and select 3GQCT (SUPER IMPORTANT!)
And make sure PhoneMode is set to DIAG.
Click the open folder icon and select the KDZ file you downloaded earlier.

Prepare the phone by enabling USB Debugging by going to Settings>Applications>Development>Enable USB Debugging, also go into Settings>SDCard & Phone Storage and make sure 'Mass storage only' is unticked. Then connect the phone to the computer via USB cable and let Windows install any drivers it needs.

Click 'Launch software update' and do not use your computer until the update is complete. The update will take roughly 10-20 mins to complete. Your phone should reboot automatically.