I tried to setup a new XP virtual PC the other day from an old CD.
Apparently windows update needed an update but there wasn't an easy way to get it. Went to the microsoft update webpage...and it didn't work in IE6. Had to get the latest IE - but actually not since that doesn't work, fortunately IE8 worked (because I had SP2). Finally got it to allow me to update windows update and then a few more rounds of updates getting the latest service pack and then windows update worked normally!
The strange thing is this isn't a problem all that unique to XP - I set up a win 7 machine earlier straight out of the box from HP - it wouldn't let me install all the updates at once, had to do them a few at a time.