For whatever reason or hunch I had, I tried an old, simple procedure....
1. Disable Windows Update
a. Click on start
b. Click on all programs
c. Click on accessories
d. Click on Run
e. Type services.msc and press ok
f. Right click on "Windows Update"
g. Click on stop (Windows Update is now disabled)
2. Rename Software Distribution folder
a. Navigate to: C:/Windows/
b. Find the folder named: ?SoftwareDistribution?
c. Rename that folder to something like ?SoftwareDistribution.old?
d. Create a new folder called ?SoftwareDistribution?
3. Enable Windows Update
a. Click on start
b. Click on all programs
c. Click on accessories
d. Click on Run
e. Type services.msc and press ok
f. Right click on windows update
g. Click on start
If you are unable to find Software Distribution Folder, follow these
steps before #2 above.
1. From the explorer window press the Alt key to view the file menu.
2. Click Tools
3. Select Folder Options
4. Select the View tab
5. Select ?Show hidden files and folders?
6. Remove the selection from ?Hide protected operating system files?
7. Click OK
Restart your PC and you should be good to go!
...and it WORKED!!

I can now get my updates.
I don't know WHY this works, but it did. However, the Windows Update interface in Control Panel (remember, I'm using Vista) has lost the history of all my previous updates before this problem occurred. I'd like to restore that information from the SoftwareDistribution that I renamed to .OLD but I don't know where to get it. It's no big deal...just wondering if that's possible.
I've also tried to delete the newly created (automaticaly) SoftwareDistribution folder but I wasn't able to do it.
Now my question is:
- can I delete the SoftwareDistribution.old folder safely and just use the new one, or is there a way to put the save the contents of the .OLD folder into the new active one?
I'm still dumbfounded why a permissions issue was solved by recreating a folder....very weird.