I have egg on my face for not remembering the KEY factor that caused the problem.
So, I solved my own problem and may as well fess up to my oversight.
When I tried to run sfc /scannow I got an error saying it couldn't start the service.
When I went to turn the service on in the Windows Module---it showed as already in the correct "Manual" setting, but when I would hit start I would get an "Error 1450: Not enough system resources....."
At some point in all this, I don't quite recall when, having tried and retried, I realized that I should check to make sure Netframework was installed and when I went to check what Windows 7 components were installed or not I got a "blank box". Something more serious than paint.net was going on here, but what? I poked around the MS Knowledge Base and other googled ideas based on the Error 1450 and ouila'.
I forgot about having just done a fresh install of ArcGIS 9.3 over the weekend. A forum tipster pointed out that the this bloated my registry and the Windows 7 registry is preset with a very low threshold. The solution was simple....a registry edit to make the size unlimited, reboot, and I could now view my Windows 7 updates and installed components and I could run sfc /scannow which showed now problems....so I attempted to install Paint.net again and after a few seconds of heistation at just about the same point on the progress bar, ouila' it installed and works perfectly.
My oversight for forgetting about the newly installed ArcGIS, it's installation went fine and it was working fine over the weekend so I never gave it a second thought that IT was the culprit.
Thank you for your reply and concern. Happy to avoid a total reinstall of Windows 7