I have had this problem twice after first installing SP3 for Windows XP and then installing IE7 through Windows Update. Windows Upadate breaks, it will download the updates but it fails when it tries to install them. Here is how I fixed the problem.
1) I created a folder called “WUAGENT” on my C drive. The address is C:\WUAGENT This name is irrelevant, you can call it whatever you want.
2) Download “WindowsUpdateAgent30-x86.exe” to the folder you just created. Click here to download it.
3) Open a command prompt (Start >> Run and type “cmd”). Run the following command to force run the exe file you just downloaded.
C:\WUAGENT\WindowsUpdateAgent30-x86.exe /wuforce
Windows Updater should now work again!