Do you have Norton System Doctor on? There's a thing on the MS Knowledge Base that says Windows Update might not work with System Doctor because SD sets up a huge number of empty files in an INF folder and that stops Update working.
Drop System Doctor, Find/Search for files oem*.inf (I can't remember the folder but it's an INF one and I don't think it's necessary to specify it), size less than 1KB, select all the zero size ones and delete them all (might take a couple of hours, I had over 12500 such files).