Where the system updates get installed in HTC explorer? I am seeing a message on my taskbar System updates are available. When I am tapping to that message it is showing some 29 MB updates. I am running sort of internal memory, so every-time I am postponing the updates to later(I think it will consume 29 MB internal memory). Is this  true that on installing the updates will consume internal memory? I am using HTC explorer having gingerbread(2.3) version of Android.
I think in many cases updates are to the system partition. The storage on your phone is split across different partitions, the system one is not where you download third party apps to and usually run out of space. So anything an update does on the system partition would not count against you, unless it repartitioned the storage to give system more room, which is rare and usually only heard of in bizarre cases where the device just couldn't support a newer version of Android any other way.

Please make sure you have gone through the list of apps in your settings and moved any that you can to your SD card, by the way, if you have one. If your phone is rooted, there are other options as well, such as removing system apps that have been updated and are using space in the usual user partition for their update data, etc..