Microsoft & Automatic Updates Bombs

This problem has been ongoing for quite a while, on and off, but has
just become much more widespread. I am running about 120 PCs on an
educational domain. A significant portion of of these computers have
previously had errors running Microsoft or Automatic Updates, but I've
managed to work around them. This last release, however, has not
successfully downloaded on any of our Windows 2000 PCs that are also
running full installs of Microsoft Office 2003. Attempting to run
Microsoft or Automatic Updates creates the following errors in Event
Logs:

Event Type: Error
Event Source: Windows Update Agent
Event Category: Software Sync
Event ID: 16
Date: 5/25/2007
Time: 6:30:01 AM
User: N/A
Computer: ZONE0602
Description:
Unable to Connect: Windows is unable to connect to the automatic
updates service and therefore cannot download and install updates
according to the set schedule. Windows will continue to try to
establish a connection.
Data:
0000: 57 69 6e 33 32 48 52 65 Win32HRe
0008: 73 75 6c 74 3d 30 78 30 sult=0x0
0010: 30 30 30 30 30 30 30 20 0000000
0018: 55 70 64 61 74 65 49 44 UpdateID
0020: 3d 7b 30 30 30 30 30 30 ={000000
0028: 30 30 2d 30 30 30 30 2d 00-0000-
0030: 30 30 30 30 2d 30 30 30 0000-000
0038: 30 2d 30 30 30 30 30 30 0-000000
0040: 30 30 30 30 30 30 7d 20 000000}
0048: 52 65 76 69 73 69 6f 6e Revision
0050: 4e 75 6d 62 65 72 3d 30 Number=0
0058: 20 00 .
---
Event Type: Error
Event Source: ESENT
Event Category: Logging/Recovery
Event ID: 413
Date: 5/30/2007
Time: 12:49:19 PM
User: N/A
Computer: ZONE0602
Description:
wuaueng.dll (932) Unable to create the log. The drive may be read-
only, out of disk space, misconfigured, or corrupted. Error -1032.


Now then, the tricky part; Windows Update will run, if the
SoftwareDistribution folder is deleted. Office Update will run
successfully. But MICROSOFT Update will not. And this is a significant
problem, given the number of PCs we have and the urgent need to get
updates installed quickly. Unfortunately our Doman Admin still has not
upgraded from his NT4.1 domain controller, so updates can't simply be
pushed out using SUS or similar services. Our virus scanner is not
blocking it. We have no firewalls running. I've tried to work with
Microsoft to resolve this but so far the answers have been
standardized and no help; remove Ad-Aware. Remove Spybot. Remove
Diskeeper. Give System group full control over C:\. All this has been
attempted with no success. I'm really at my wits end. Any suggestions??