I'm in the same boat. Just ran software update and there were updates for iTunes, Airport Utility, and two other things that seemed minor. After the download completed and I clicked restart, the screen went to the linen wallpaper and I looked up to see a vague error message which said something about the updates failing with a restart button. Upon restart I get the same kernel panic screen as you on two attempts. I have the 2011 27" iMac.
Update: I found this thread on the Apple forums:
https://discussions.apple.com/thread/4020063?start=0&tstart=0
And I'm following these instructions by BoySetsTheFire:
"Seems to be a problem.* Start up with the Command-R keys depressed.* Then select reinstall Lion.* This will reinstall Lion and leave all your files and prefs intact.* It gave me Lion 10.7.3.* Then run software update which moves you to 10.7.4.* If you run software update again, it will offer you Thunderbolt and iPhoto update.* DON'T DO IT!* Wait until we hear there is a fix from Apple."