as you requested here are the logs with windows update service disabled...hope i did not make a mistake in the procedure you requested and hopefully you might find out what is wrong...thanks in advance for your effort...

logs.7z

any luck with the recent logs i attached? or should i proceed with the restore to a previous state?

any luck with the recent logs i attached? or should i proceed with the restore to a previous state?

I do not know much about deciphering logs, but I know how to get help. You might try a system restore to prior to Windows update attempted install of MSE 2.

You can also set up a case with MS here at no charge:

https://support.microsoft.com/oas/default.aspx?gprid=6527&st=1&wfxredirect=1

There is also this:

For home users, no-charge support is available by calling 1-866-PCSAFETY (1-866-727-2338; and/or 1-866-234-6020 and/or 1-800-936-5700) in the United States and in Canada or by contacting your local Microsoft subsidiary. There is no-charge for support calls that are associated with security updates. When you call, clearly state that your problem is related to a Security Update and cite the update's KB number (e.g., KB982312; KB2092914).

I found some more things you might try:

http://support.microsoft.com/kb/958055

You could possibly rename or delete this:

c:\9b53f85f7ed01fc7c7830c4f\amd64\mp_ambits.msi

A leftover file there, Also in C:\windows\temp and %userprofile%\Local Settings\Temp, etc could have read-only files left over from other installers/programs that this update needs to overwrite and cannot. This used to be a big problem back in the Win9x days but it never hurts to empty out those folders.

Some other leads:

http://social.answers.microsoft.com/Forums/en-US/msestart/thread/908fad3e-f9fc-4d8a-be83-ae7d3bc48db5

These logs aren't very helpful. Neither of the MSIb8c2x logs really have any info you need to worry about. The only "error" in there is the APPCOMPAT message, but I am fairly certain that can be ignored. The CBS log doesn't seem to have any related info either. You can see the MSI logs are recording at 12:02 but the latest time on CBS is 11:59.

If this wasn't done already:

http://support.microsoft.com/kb/223300

we want to enable the switch /l*vx

I've had problems determining why MSSE wouldn't install in the old version, and the cause of the problem was that MSSE installs with a Wrapper and isn't very friendly or responsive to troubleshooting. My problem was that MSSE wouldn't install on an x64 system that had Office installed on it. It was never resolved.