Sounds like you got your Z from the same guy I did, Dan Hughes . Mine works fine flashing - it could be your USB settings or lack of free space. What I suggest you do is try flashing using the \"Linux\" method. Copy the OSPACK file to a CF card, put the CF card in the zaurus, switch to \"Replace battery\" mode, then hold down C, D and tap the reset button on the back. This should flash you to the latest version. Also, make sure you have at least 17MB free before flashing!
As some free advertising, if you do wanna buy a Zaurus in the UK from ebay, Dan Hughes from Singapore is definitely a safe bet!