Asking for a friend again, recently he purchased a 320GB Xbox 360 HDD, it was obviously purchased used as the profiles currently on it do not contain any characters, only generic faded characters. I told my friend the hdd may require a system update and then he asked if only hdd needs an update or if the console (without hdd) requires updating as well. Originally the console has 4GB internal memory but hasn't been connected to internet or Xbox Live in years so it did not update automatically.
If you copy the same system update the Xbox 360 is currently on to a FAT32 formatted usb hard drive and power the Xbox 360 on with the USB drive connected, it will prompt you to restore the avatar / kinect data. Providing the Xbox 360 s not Jtag / RGH hacked you can just update with the latest version here: Xbox 360 Dashboard / System Update 2.0.17559.0 Download With Avatars
My friend copied the update files on a freshy formatted USB drive, I believe what he is wondering is does the update need to be installed to the console or the hard drive? or both?
It will just install when its run from usb, you get no choice as to where. The avatar / kinect data will generally be saved to the hard drive, unless your console has internal storage.