The problem, as explained by Nate Clinton (Program Manager, Windows Update) is
"the latest version of Windows Update includes wups2.dll that was not originally present in Windows XP. Therefore, after the repair install of the OS, wups2.dll remains on the system but its registry entries are missing. This mismatch causes updates to fail installation."If you are affected, contact Product Support Services. In the U.S. and Canada, help with security update issues or viruses can be obtained at no charge using the PC Safety line (1-866-PC-SAFETY). For locations outside the U.S. and Canada, go to http://support.microsoft.com/security for the number in your area.
See the blog post by the Windows Update Team and Microsoft Knowledge Base Articles:
- KB 943144: Updates are not installed successfully from Windows Update, from Microsoft Update, or by using Automatic Updates after you repair a Windows XP installation
- KB 916259: The Windows Update Web site and the Microsoft Update Web site do not scan for updates when you repair a failed installation of Windows XP Service Pack 2 or of Windows XP Service Pack 1