Yes this is a double post I know, but I just wanted everyone to know that tried to help that I found the problem.
I tested my console out with my cousin's 360 he JUST bought.
My first test is what found the problem....
Into thinkin it was the console itself, I went to return it to where I bought it because it's still under warranty...but because it was after midnight, they wouldn't accept it back until in the morning...I was pissed because I had to drive 75 miles *going to work, then coming back home to pick up the console because I forgot it, and then going BACK to the town where I work...25+25+25 = 75* but that happened for a good reason in the end. My cousin just bought his console from somebody for 150. He hooked his up and I told him that I'm gonna run through some tests right quick. I checked to see if his console would do the update through the MS installation cd. It did like a charm. Then I unhooked his console, hooked up mine, and popped in an Xbox Original with his hdd attached to my console...low and behold, the Xbox screen pops up and it asks me for the online update....
So in the end, it's not my console, it's my hdd. For some reason, I ended up buying a faulty 20GB Xbox 360 hdd. I'm hoping like hell that MS will take that 20GB hdd and replace it for another one....what confuses me is that there's NOTHING on the hdd...so there's no faulty files or anything and it STILL works like a charm with 360 games, but not originals...but regardless, it's because of my hdd. I'll have to give MS a call when I wake up in the morning/afternoon before I go to work.