AT, All I did way back when is update to SP2, get all the 'critical updates' and then turned off 'auto-update'. I have not updated my Win XP in close to 10 months. (My system is working fine, why on earth would I install updates when my system is running fine?) I think too many people get 'lured' into thinking that 'all updates are critical' they often run into problems like you are having.
The only exception I have to 'updates' does not involve MS.. I will update my graphics driver if I find a new game does not work/run. (Since I cannot afford new software/games this is no longer an issue) My last graphics update was driver v84.21 march 2006, they are up to v93.71 november 2006. I suppose that since no new driver has been made since november 2006 I should update it to this version but.. "Why would I update if everything is working fine?"
Seriously, if everything is working why the need for an update? 'Security updates' are imho close to 'bogus' they seem to fix a specific problem on a specific configuration. 99% of the time it does not affect your own system security needs.
here are some words of advice.. "If it aint broke don't fix it."
anyways, sorry for the rant, too many people get 'hooked' into thinking they 'have' to update their systems. It's like spending time/money to get the latest HDTV big screen technology to watch your VHS collection. Duh!
Cheers!