Joe,
From your description around not being able to turn on/off optional windows features, like IIS. It sounds like you are hitting a known issue with the one of the windows installation technologies. Bascailly, the windows installer is likely to have a stuck transaction which makes it impossible to install/uninstall optional windows features. This would be the reason you are unable to enable iis via the add/remove programs as well as via webPI.
As you mention in your post the work around is to do a inplace upgrade. Before trying that, you may want to try an OS repair. We have seen some cases where this works and others where the in place upgrade is required.
Given that you are hitting this issue I reccomend you try the work arounds as Windows Updates can be impacted by this bug as well as other optional windows features.
While not great news this should help get you on a path to fix up your system.
Will