I wasn't sure what happened but with the marvel of VMs I was able to save a snapshot and then roll back to the snapshot right before I ran WOU. I then did exactly the same thing, mounting the exact same ISO. This time all the security updates were applied. I then saved another snapshot with the successfully applied updates. I have copied the logs from both snapshots, stripped the timestamps and did a compare of the entries. Here is the area that differs.
Snapshot WOU fail:
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Info: Detected state of service 'Windows Update': Start Pending (start mode: Auto)
Info: Installed ..\w60\glb\Windows6.0-KB2862973-x86.msu
Info: Installed 1 updates
Snapshot WOU success:
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Info: Detected state of service 'Windows Update': Running (start mode: Auto)
Info: Skipped update kb976002 (Browser Choice) due to matching black list entry
Info: Skipped update kb890830 (Malicious Software Removal Tool) due to matching black list entry
Info: Installed ..\w60\glb\windows6.0-kb2803821-v2-x86_a46661e1fd6873c444da3e51bc196bfa2626b290.cab
Info: Installed ..\w60\glb\windows6.0-kb2864063-x86_efa19bad847ce0b1d53fd77f75923a60f21c8270.cab
Info: Installed ..\w60\glb\windows6.0-kb2883150-x86_fd2c1f1c784ebc78599aa71a4740e9af27d1d809.cab
Info: Installed ..\w60\glb\windows6.0-kb2863253-x86_19afb851cd24729dba5ec1966dcad1cae5ad6f6a.cab
Info: Installed ..\w60\glb\windows6.0-kb2861190-x86_ed646c416fc8ea9b510808b5d71860f997b14aed.cab
Info: Installed ..\dotnet\x86-glb\ndp35sp1-kb2861697-x86_00011f82279874680d2d5812aad94303aa4af7db.exe
Info: Installed ..\w60\glb\windows6.0-kb2855844-x86_2482dc2c0a61f816f742a44404b16e525775dd56.cab
Info: Installed ..\w60\glb\windows6.0-kb2876284-x86_0a1cf85e7c664814b028f6e21e833b01707192d1.cab
Info: Installed ..\w60\glb\ie9-windows6.0-kb2879017-x86_ee8cc9b191ee2aab552f14a818d81df349e9d32f.cab
Info: Installed ..\w60\glb\windows6.0-kb2847311-x86_4e41da6059476fa40f792d4098180a55a5365b66.cab
Info: Installed ..\w60\glb\windows6.0-kb2862330-x86_64eaf34916c6389bfb0ee3664d3b9f2a6bbde7bd.cab
Info: Installed ..\w60\glb\windows6.0-kb2862335-x86_68b63f59ec6579f81225ad344520125dd6ca6445.cab
Info: Installed ..\w60\glb\windows6.0-kb2864202-x86_41c5f99f67190be763def6f5e125a5e42d20f3da.cab
Info: Installed ..\w60\glb\windows6.0-kb2868038-x86_8b9e527d583a76ecc81f2118e12084be048332a9.cab
Info: Installed ..\w60\glb\windows6.0-kb2884256-x86_ed31b0bcf8f0c8be37fd45a9b2f468696a9b9749.cab
Info: Installed ..\w60\glb\windows6.0-kb2864058-x86_9c37865de59aacc233df257b66588ca622978324.cab
Info: Installed ..\w60\glb\Windows6.0-KB2862973-x86.msu
Info: Installed 17 updates
Both of those are from when WOU was on the WOUTempAdmin account. KB2862973 is a custom update I added. I wonder if maybe due to lack of waiting for Windows Update to initialize after auto login it couldn't figure out what security updates needed to be applied? But your guesses will be much better than mine I'm sure. I have both snapshots saved but I want to get rid of the failed one at some point, so let me know what you need if anything. Thanks