Instructions
Xbox Live
Turn on the Xbox 360.
Sign into Xbox Live.
Click "Yes" if Xbox Live prompts you to update your system.
Flash Drive
Plug the USB drive into your computer.
Download the update from Microsoft (see link in References) and unzip the file.
Copy the unzipped files onto the USB drive.
Turn off the Xbox 360 and remove the flash drive from the computer, then plug the flash drive into the Xbox 360.
Turn the Xbox 360 on, then select "Yes" as the update automatically starts.