Bad news: Service Pack 3 for Windows XP, or one of the subsequent patches, breaks Windows Update. Not all the time, but often enough that I got burned twice.
Good news: Microsoft offers free technical support for Windows Update and that support provided a solution to my problem.
While consumers are conditioned to call their hardware manufacturer for technical support, Microsoft offers free support for Service Pack 3 for Windows XP, IE7 and Windows Update. Support for SP3 and IE7 is offered on the phone (866-234-6020), although, I had a hard time qualifying. Support for Windows Update is offered by email.
To request assistance with Windows Update, start at the Windows Update website (Tools -> Windows Update in IE6 and IE7) and click on the "Get help and support" link in the gray stripe on the left. Then click on "Send a problem report".
The best way to do this is with Internet Explorer on the computer with the problem. This allows Microsoft to download an ActiveX control that gathers assorted debugging information and sends it back to them. In my case, this debugging information proved critical.
A Microsoft technician responded to my plea for help well within their 24 hour goal.
My problem was particularly annoying because there was no error code, thus nothing to search the net for. The error message simply referred to "a problem on your computer". In addition, a review of the update history (click on "Review your update history" in the left side gray stripe) showed no failures at all. I had even checked the system event logs and come up empty.
It turns out that Windows Update has 2.5 activity log files.
In addition to the "update history", there are two plain text log files in the C:\WINDOWS folder. The "half" is a file called "Windows Update.log" which doesn't seem to be used any longer. I checked four XP machines and in each case the file had almost no data and hadn't been updated in a long time.
Update: A reader named Joseph pointed out that this is from an older version of Windows Update.(July 27, 2008)
But the other log file, "WindowsUpdate.log" is a gold mine of information (this file has no spaces in the name). It was included in the debugging information sent to Microsoft and revealed that my problem was an error 0x80004002.
Windows Update was resuscitated with the oldest trick in the book, re-installing the software.
Microsoft's first suggestion was to download version 3 of the Windows Update "Agent" (file WindowsUpdateAgent30-x86.exe) to the root of the C disk, then run it with Start -> Run and the following command:
The installation was quick and painless. On both computers, this fixed the problem.
The link to this stand-alone version of the Windows Update agent may change over time. A technician at Microsoft suggested getting the software from here. This fix is also offered here, for a similar Windows Update problem.
There's no way for me to know how widespread this problem is. If you've had problems with Windows Update after installing Windows XP SP3 leave a comment below.
I don't use Automatic Updates, but if you do, and find the yellow shield never goes away, you may be experiencing this problem. To see, try running Windows Update manually from the website to insure it can install patches.
A brief search turned up forum postings at Microsoft.com from others with this problem. This thread, XP SP3 Preventing any other Windows Update Installs, started almost 3 months ago.
The thread includes an email from Microsoft technical support with three possible fixes. One of them, involving re-registering DLLs, was my fallback if the first suggestion didn't work. Scott Dunn from Windows Secrets covered re-registering Windows Update DLLs last September in Stealth Windows update prevents XP repair.
Finally, let me repeat a warning about upgrading to Internet Explorer 7. When you first install IE7, you get a known buggy version. After rebooting, run Windows Update immediately to get the patch shown below
Update July 27, 2008: After installing XP SP3 and all the subsequent patches on three more computers, my best guess is that the problem has to do with the type of license for Windows. On all four machines that were purchased from the same hardware vendor (very different models), Windows Update broke. However, a copy of Windows XP purchased at retail in a shrink-wrapped box had no problems with Windows Update.