Thanks for the quick reply Brent.

The xml file is located in the windows directory C:\. I also set the DED to download from output entry. I attached the error from the workflow.

If the XML file is not in Laserfiche, but rather in Windows, you must use a Script activity to read the content of the XML into a token.  To start with create a token with the windows path for the XML file and name the token XMLWinPATH.  Then use regular Script activity (not a SDK Script) to read the XMLWinPath token and load the XML content into a token called XMLContent.  In your Read XML activity, point the source at the script_xmlcontent token.

        Protected Overrides Sub Execute()
            'Write your code here.
            Dim XMLContent As String = Nothing
            Dim ScriptError as String = Nothing
            Dim sWinPath as String = TokenReplace("%(XMLWinPath)")
            Dim fi as New System.IO.FileInfo(sWinPath)
            If fi.Exists Then
                If fi.Extension.ToLower() = ".xml" Then
                    Try
                        Using sr As New System.IO.StreamReader(sWinPath)
                             XMLContent = sr.ReadToEnd()
                        End Using
                    Catch ex As Exception
                        ScriptError = ex.Message
                    End Try
                Else
                    ScriptError = "File not XML: " & sWinPath
                End If
            Else
                ScriptError = "File not Found: " & sWinPath
            End If
            SetToken("ScriptError", ScriptError)
            SetToken("XMLContent", XMLContent)
        End Sub

Use a Track Tokens activity to read the XMLContent and/or the ScriptError tokens.