Hello everybody. I just want to share my strange experience with the install of kinect and avatar update.
After reading completely this thread and trying every single advice I still could not get the update window to popup. I have a 360 slim with Freestyle 3 installed. The strange thing was different behavior of XBOX based on which USB port i put the stick in. I have 3 USB ports back and 2 in the front. I only used back ones for this and the one which is closest to the middle wouldn't even recognize the stick. I used the one in the middle for all other times and for some strange reason the contents of the USB got renamed to some unreadable data with the letter | for folder. I didn't noticed this at first because I was formatting the USB(goes faster then deleting).
What helped me in the end is to put both copies of the update contents in to $SystemUpdate and $$ystemUpdate, boot to FSD, go to original XBOX menu and THEN stick the USB in the port CLOSEST to the cover. Then I got the update working . Go figure.. Hope this helps someone with similar problems.
