I turned on logging and scanned the log file generated.
I keyed in on this portion of the logs:
MSI (s) (70:34) [17:16:33:224]: Note: 1: 1708
MSI (s) (70:34) [17:16:33:225]: Product: Windows Live ID Sign-in Assistant -- Installation failed.
Okay, so that's annoying. I did the following:
(1) Used a third-party program to specifically and only uninstall the Windows Live ID Sign-In Assistant.
(2) In the process removing the Sign-In Assistant I was informed that I would need to exit the program AIDA64 developed by FinalWire Ltd to continue with the uninstall process.
(3) I exited AIDA64 and completed the uninstall of the Sign-In Assistant.
(4) I was prompted to reboot and did so.
(5) I ran the GFWL web-installer which detected I had everything already installed EXCEPT for the Sign-In Assistant.
(6) Installed the Sign-In Assistant.
(7) Ran Windows Update and the GFWL update was listed.
(8) Attempted to again install the "Update for Games for Windows Sofware 3.5". Install was a SUCCESS.
In my case it appears the fact that the Windows Live ID Sign-In Assistant was being locked by another program was the culprit for my inability to install the WU update for GFWL.