Ok, second first... I ran the 'scan checker tool' before posting and it came up "No problems found"...ran it after doing your method 1...(and update still hanging at the 'creating a restore point) This run, same thing, "No problems found".
Now to your "method 1"
Following the steps in order that you entered: (.dlls listed did what was expected) NOTE: Did skip step 4)
STEP 2.
Appidsvc.dll..........not started
STEP 6.
regsvr.exe mshtml...............not recognized.
shdocvw.dll.....was loaded but no entry point dllregisterServer found
browseui.dll....failed to load
msxml.dll......... " "
To save some typing, the following regsrv.exe got the "Failed to load" message.
gpkcsp.dll
sccbase.dll
sibcsp.dll
initki.dll
Wuaueng.dll....make sure binary is loaded at path, or debug
wultui.dll........... same as above
wuweb.dll......... same as above
qmgr.dll............ was loaded but entry point not found
muweb.dll......... failed to load
STEP 9.
net start cryptsvc......already been started (brought up "Fix it") ran it, and told to run update.
Did so and it showed "searching for updates failed.
Everything else you listed ran ok, or showed as ok, stopped, started, etc.
Rebooted PC and tried running update.
Found 10 major, 1 suggested update.
I selected one small update (about 500 KB), clicked "install updates"
Started and when it got to the "creating restore point" hung... I waited over 5 minutes for the restore to do something or go to the next step...it never finished the restore point.
Stopped and closed update...
Now I keep a watch on what starts during start up (I'm the only one using this computer and no one else has access to it) Nothing new has bee added in the start up since the last successful windows update.
There was one post that suggested disabling the VSS. I tried and found the ability to use change the settings...were all grayed out.
I tried disabling it using a 3rd party software program. The 'disable', it showed it disabled, and then changed right back to 'manual'.
I've added no software since the last update...
I've run Norton full system scan for viruses...
The PC/ other programs run fine except for the windows update.
Out of ideas...