Windows 10 Recovery Tools - Bootable Rescue Disk  

Yes, wait.. it will finish..

Also your pendrive should be the setup media files - not the ISO file..

ie.. extract the ISO and copy the inside the ISO to USB

Or just double-click ISO file to mount it..
Program will find Mount ISO, DVD or USB Media..

Yes, now run option 2
Yes, you can prepare USB with extracted ISO files

Or just double-click ISO file to mount it..
Program will find Mount ISO, DVD or USB Media..

Post pic of results from option 2

This makes a good reference for others...

Sure Kyhi!
Here are the results of Option 2. It cannot find the source files. (USB pendrive was still not ready will running this option 2). Now it's plugged.
And what to do with the DISM log?

Still not clear the following excerpt from Readme and whether it could be relevant in this context:
Note: Dism uses the component store as it's main source for Image Repair, and windows updates are placed in the component store, so best to try to use current component store for RestoreHealth,
before selecting Option 3 and redirecting the repair source, to the windows setup media..

EDIT: even re-running Option 2 with detected USB pendrive w/ extracted Win 10 ISO files, the result is the same.
Is only the Option 3 able to detect the 'source' different than the component store?

I used to edit the Regedit in Windows 7 in order to specify c:\i386 as installation folder for use with sfc /scannow but now I cannot figure out how to use the information at Configure a Windows Repair Source to specify the source.

Is only the Option 3 able to detect the 'source' different than the component store?

Yes, only option use the Media as a repair source..

Just wait - it has to copy the install.wim to a TEMP folder - then mount the install.wim