Found out what was causing the error, it's an option that you can enable/disable that when a new object is created or imported it goes into edit mode instead of staying in object mode, the option is under user preferences -> editing, it is the first check box on the left side of this screen

https://drive.google.com/file/d/0ByitSHayj8hRTFRRay13cHBJbUU/edit?usp=sharing

This link should work for the scout_morphs_low.dmx.smd

It isn't one of the files under sourcesdk_content, it was something I got from decompiling the mdl I extracted from the vpk file. Also the file is scout_morphs_low.dmx.smd, so it is an smd file not a dmx, likely a result from decompiling, my mistake for not noticing the full name.

Though these files I used to be able to import with the older versions of the source tools and blender. Also with blender 2.69 and source tools 1.10.4, I exported a simple sphere mesh as an smd to test the import tool and it resulted in the same thing, an icosphere at the center.

OS: Windows 7 home premium 64-bit(6.1, build 7601)
CPU:intel i7 1.6ghz 8cpu
RAM:8gb
GPU: Nvidia GeForce GTS 360M
VRAM:4gb

list of add-ons enabled:
import-export: autodesk 3DS format
import-export: autodesk FBX format
import-export: BioVision Motion Capture format
import-export: Blender Source Tools(v. 1.10.4)
import-export: STL format
import-export: Scalable Vector Graphics 1.1 format
import-export: Stanford PLY format
import-export: UV layout
import-export: Wavefront OBJ format
import-export: Web3D X3D/VRML2 format
Mesh: extrude along curve
Mesh: inset polygon
Mesh: loop tools
Render: cycles Render engine

Method of install:
download windows blender installer
ran it, overrode previous version of blender.
Used http://steamreview.org/BlenderSourceTools/ install instructions to install 1.10.4 source tools and download them.

Previous version:
Blender: 2.65
source tools: 1.6.3

Current version:
Blender: 2.69
source tools: 1.10.4

Versions that work:
blender 2.65 + 1.6.3 source tools

Versions that don't work:
blender 2.69 + 1.10.4 source tools
blender 2.69 + 1.6.3 source tools

This is all just the import tool, the export tool seems to work fine.

The current version I'm using is 1.10.4, most recent, the old tools were 1.6.3. I'm getting the error with the new tools, and the old tools, either one I install the results are the same.

When I try to import any smd models it imports whatever bones as a somewhat jumbled skeleton, and the mesh is just an icosphere at the origin. Below is an image of the error I'm getting when I try to import models. The models range anywhere from self made models to valve decompiled models to a simple sphere. In each case the result is the same.

I'm using version 2.69 of blender, 64 bit. I recently updated blender from 2.65 to 2.69 and re-installed add-ons, prior to updating the old smd io add-on worked fine.

http://i1168.photobucket.com/albums/r498/infinitewrath/random/smd_error_zps1afa6069.png

and this is what happens when I try to import the scout_morphs_low.dmx file

http://i1168.photobucket.com/albums/r498/infinitewrath/random/scout_morphs_zps2af2d35e.png