Make sure that you are dropping the update file into the upper region of the AR Manager's window. It won't read it as an update if you drop it over any of the code-list areas. (Funny that it doesn't say it "isn't a Code List file" in that situation... it seems that it still recognizes it as a Firmware file but won't open it or something; I dunno. Weird. )
You DID download the file from the official site, right? If so, you should have noticed the complete instructions of how to use the Firmware Update file, since the download link is at the bottom region of the page.
Also, you are using the correct update file for your AR, right? They have a (small) comment that the update does NOT apply to all AR models. (The only one I noticed it specifically mention was the AR-Media [i think that's what it was called. It's the model that can run music and movies and such]. It also does claim that the update works for the basic AR and ARDSi as well, and while multiple people claim that the update works for ARDSi [some comments can be found in this thread], the ARDS [original basic ver.] doesn't seem to accept it [see mine or some other prior posts for details].)
I hope this helped! (Though, all that should be in the first post anyway... )