I had change of heart, the guys over at 360mods prevailed on me to release this for free.
So for all to see , here is how you fix the update failed error in all cases:
The error seems to happen when the 360 is unable to read from the update source during the update. The only time I have actually seen it occur was when updating from a backup, which is a common cause Ive read about. The other common cause is an onset of RROD during the update. Im not sure what causes the hard drive error. Either way, the solution is simply to supply the 360 with the correct update file either on a CD or a USB stick. Now here's the rub, it has to be the exact same update file as the one that failed. Not a problem since I've made a nice torrent file with all of the updates to date here:
GoogleThe version number is shown at the bottom of the error screen. PV is for previous version and CV for current version. Just put the file matching the current version (the one you are updating to) on a USB stick, (i.e. E:/$SystemUpdate) put it in your 360, and power up. If you have the right one it will finish updating and boot to the dashboard. Voila.
This has worked for me on 7 consoles so far. 3 of them said they couldn't detect the hard drive and the other four the update disc, so this seems to work in all cases. I hope this can help some people out.