I got this error code earlier today when I tried to install the new update. Since then I've tried to install the update through a usb flashdrive (removing all other storage devices beforehand) and I'm still prompted to update when signing in to Xbox Live (though I noticed that the manual update download here says it was last modified on 5/17/2011 so I wonder if that's actually the current update?). I know there's a lot of threads out there already covering similar topics, but none of them seem to match my exact error code.
I've also heard that a lot of these error codes are being generated from supposed "tampering" of the 360 unit. However, my 360 is fairly new, purchased in early 2010, and I haven't had any problems up to now. I've never repaired it, opened the case or anything else. My hard drive is an old 20gb from my launch 360, and other than that I have two flashdrives for storage.
And for the record, this isn't happening to just my 360, but also my roommate's, another arcade unit purchased in early 2010. Again, he's had no troubles with his 360 and no history of repairs. All he has on it is a 20gb hard drive harvested from his dead launch 360, and aside from Mass Effect he only uses it for Netflix.