What firmware version are you upgrading from?  Please read back the "versions" line from settings -> chumby info.

What text (if any) do you see at the top of the screen when the update fails?

A few things you can try:

1. If you can still boot your chumby into normal mode (you may have to tap the screen once when you see the inital boot screen), insert your USB drive with the latest firmware update extracted to it ( http://files.chumby.com/resources/chumby_fw_1-5-0.zip ) and boot into normal mode.  Once the device has booted, open the control panel, click settings -> chumby info, then click the pi symbol in the upper-right hand corner.  Once the pi screen is up, click "REPAIR SAFE MODE".  This should attempt to update the secondary kernel and root filesystem with the latest software.  If this succeeds, boot into special options mode (hold the screen down for 5 seconds during power-on) and attempt to perform a USB update.

2. create a 'debugchumby' file (without the quotes) containing the following, place it on your usb drive, insert it into your chumby and boot into special options mode:

#!/bin/sh
rm -f /psp/update_available
sync

Once you've booted into special options mode, try your USB update.

3. If you're attempting to upgrade from a software version prior to 1.4, there is a known bug pertaining to improper handling of bad blocks on the NAND flash.  To get around this, extract http://files.chumby.com/resources/repai … ks-1.5.zip to a USB drive, insert it into your chumby and boot it up (the device should attempt to update itself automatically).