It had nothing to do with the fact that the computer was a Virtual Machine.
(We actually took an image and sent it to Microsoft, it was their boo-boo (they forgot to program code to fix the VMWare bug))

So, I went to install SP3 today. Windows Update downloads it all right, I tell it to install and go get some food.
I come back and see an error: "Access denied." The rest is something to the effect of "press OK to undo everything changed by the installation" (I don't remember the exact message) A retry button? Nope. Not at all. Just a big fat "wow, you wasted your time, loser".

After it undoes everything (though apparently it might not!), this is the end result:

An update that doesn't work and "may" break my operating system. Thanks Microsoft!

I guess there plan with this SP was to make people change to vista?

I upgraded to SP3 just fine. Just download it from here http://www.microsoft.com/downloads/details.aspx?FamilyID=5b33b5a8-5e76-401f-be08-1e1555d4f3d4&DisplayLang=en

Its because IE was open somewhere in the background.

Not really the background. Windows Update cannot run within Firefox. Windows Update is the only thing that I ever use Internet Explorer for.

Same here. My IE is stuffed, I played with the registry. It worked for 2 weeks, went lightning fast and loaded multiple images at the same time and then it just died...

Nothing he's a chronic liar trying to sound smart.

Just a heads up.

http://windizupdate.com/

Not that I've used it, but it's apparently capable of updating through a non-IE browser.

Firefox has an extension that allows you to view IE only pages

I have SP3, and it's not all that different from SP2. But, yes, FF does have an extensio to view IE only pages. You can get SP3 from Microsoft's website, and install it on your PC or Mac. (for protection against Lawyers, install over existing XP version.