That's because the ROM is not an update.zip. Go into recovery (hold x while powering on) and go to:
Install zip from sdcard > choose zip from sdcard > clockworkmod > download >
DroidAfterMarket.com > koush > motorola > sholes > cyanogen_sholes.ota-eng.koush_5.0.5.3.zip
(this will install the ROM)
Then (without rebooting) go to:
Install zip from sdcard > choose zip from sdcard > clockworkmod > download > briancrook.ca > android > nexus > gapps > gapps-passion-EPE54B-signed.zip
(this will install google apps...and I hope you chose to download them when you downloaded the rom...market is included in that download and it's a PITA without it
)
Optional (but HIGHLY recommended) - VERIFY THAT THE ABOVE FILES ARE PRESENT PRIOR TO DOING THIS
Before you load the ROM:
on main recovery screen, click on wipe data/factory reset
then go to:
partitions menu > format system
partitions menu > format cache
partitions menu > format boot
This will help to ensure a clean install.