DebtMan,
With version 3.5.02 copy the install folder to your PC. Check that the folders do not have any odd characters within their names, if they do remove them. Some times they have English and Chinese titles and the chinese text appears as rectangles because the font needed is not on the system. Windows has problems with these. Then try and install the tools from your PC.
The update tool on your 3.68 install seems to have a problem detecting your player try plugging it into another USB port and make sure it is turned on. It should appear in Explorer as a new drive and the screen on your player should go to a USB connection screen of some type.
Be sure you have made a backup of your firmware with s1fwx before using the Update tool, if anything goes wrong you will need it to recover your player.
You can download s1fwx from
HERE and there is a guide on how to use it in the Knowledge Base
HERE