I've been seeing a number of Win2008 servers with issues installing updates for no good reason. Turns out it's an internal Windows thing that is getting corrupted. Microsoft has released a tool to resolve a number of potential issues as described in KB947821 (http://support.microsoft.com/kb/947821).
The error I was trying to resolve was was 0x80070490 when installing update KB967723 via Windows Update. However, it did not successfully install for me afterwards and the logs indicated that no errors were found or fixed.
I was able to manually download the file and install it. So, it seems to be a specific issue with Windows Update.
A repair install is the next step, but I don't think I'll go there yet. As only one update would not apply. If it becomes an issue for all updates then I'll do the repair.