I finally was able to solve this problem. I found the answer on another forum and it solved the problem as well.
The error was caused by the Intel Rapid Storage Technology program that comes with my Toshiba laptop.
I guess the old driver didn't like the new 640gb hard drive I installed. Maybe it was only designed for up to 500gb (this is my old hard drive size that worked fine).
The Intel Rapid Storage Technology program was shown in the taskbar notifications with a yellow exclamation point.
As soon as I updated this driver to the latest from the Intel website, Windows Update and everything else worked.
Hope this helps everyone else having the same problem.