If the computer can see the LabQuest update file, but the LabQuest can not, the update file probably needs to be unzipped first. The file that you download from the Vernier web site is a .zip file, and it must be unzipped in order for LabQuest to see the files. For details, see:
What is the ideal way to prepare a USB thumb drive for updating original LabQuest?

If the LabQuest does not show that the USB drive is connected, see:
My USB drive is not recognized by LabQuest. What can I do?