Xboxavatarwidget 20081215110225
The "Avatar" is the character you play as in game, it is the same avatar you create for your xbox live account on the Xbox Dashboard.

While you can (obviously) customise your character by using the xbox dashboard, the In the game your dialouge is preset and decisions are laid out to accept side quests or not. Furthermore, when you are hit by an enemy, your voice is heard (tone varies by gender), this voice cannot be customized. Your fighting style is also preset, but besides all of all that, customization of your Avatar allows for intresting combinations (example: an Avatar wearing ODST armor from Halo).