Well, after weeks of dealing with this issue, just when I thought I had seen everything... Microsoft has failed at identifying one of ITS OWN problems once again!
I found an obscure mention in a vague post about security updates failing (can't even find it again now), where they mentioned stopping IIS allowed them to install these updates... and what do you know... it worked!
It turns out that this server doesn't even need IIS running at all (I didn't know, and didn't want to just start disabling services because a proprietary software developer is running a medical SQL platform on this machine and they couldn't figure out the problem either).
When you do a clean boot, and only have MS services running, and updates still fail... it's pretty obvious that it is an OS problem... not a misconfiguration, but a BUG... a FAIL on the part of MS developers to properly have the update failures generate errors or logs to properly identify an internal MICROSOFT issue. Now I see why so many are now abandoning MS products, going purely with OSX or Linux! Sure would be nice if a large group of us could get together and file a lawsuit against the software giant to regain a fraction of the billions of dollars in lost time and resources spent trying to fix their problems.
So frustrating.... But Sysnative... YOU GUYS ARE AWESOME! THANK YOU VERY MUCH for your time and effort to help me try to track this down and get it corrected! Maybe this post will save the next poor soul weeks of time and effort as well as hours, days... maybe even weeks of system downtime!!