Well, it does appear you've tried everything with no success.
Short of uninstalling/reinstalling, have you tried logging into Windows with a different user account? If you use the Welcome Screen, press Ctrl+Alt+Del. This should open the classic log-in shell. Use the default Administrator user. This is the account that Windows sets up when you install. It may or may not have a password, depending on whether you set one during the install process.
If you can't get logged in as Administrator, try adding a new user (you can delete it later). Go to Control Panel, User Accounts. After naming the new account, be sure to put it in the Computer Administrator security group. Reboot and log in as the new user. Try installing the udpate again.
You could try booting in Safe Mode (since you have downloaded the update file) or Safe Mode with Networking (if you want to try the Microsoft Update site). While starting your computer tap the F8 key once every second during the memory count up, or during the system spash screen where you see the system maker's name (HP, COMPAQ, DELL....etc.) This will result in a text based menu. Use the curors/arrorw keys to navigate to SAFE MODE and hit enter.
You could try SFC (System File Checker). It can fix certain issues in Windows where specific system files get corrupted, deleted, or infected. Basically the System File Protection watches the system files and checks their integrity against it's knowledge of what these files are supposed to look like. Generally if a system file get's "messed with" windows will let you know and give you the option to dissallow the change, sometimes you don't get this option though. The System File Checker is a command line utility that will initiate a scan of all the system files to make sure they are in their original state, present on the system, and or working properly. It's an easy tool to use but the user HAS to have an XP disk for it to work.
Do you have a valid XP cd?
If so, place it in your CD ROM drive and follow the instructions belowStart > Run > cmd
then typesfc /scannow (note the space)
let this run untill you get a message saying it is complete.SFC
- system file checker, retrieves the correct version of the file from %Systemroot%\System32\Dllcache or the Windows installation source files, and then replaces the incorrect file.
Do you have a reliable Antivirus and AntiSpyware software installed? Do you keep it updated and do you scan regularly? If you don't have commercial products, there are some very reliable freeware options available.
a-squared - http://www.emsisoft..../software/free/
AntiVir - http://www.free-av.com/
Avast - http://www.avast.com...ast_4_home.html
AVG - http://free.grisoft.com/
BitDefender - http://www.bitdefender.com
ClamWin - http://www.clamwin.com/
Ad-aware - http://www.lavasoft....ftware/adaware/
Bazooka - http://www.kephyr.co...nner/index.html
Hijackthis - http://www.spywarein.../downloads.html
SpyBot Search & Destroy - http://spybot.safer-networking.de/
SpywareBlaster - http://www.javacools...areblaster.html
SpywareGuard - http://www.wildersse...ywareguard.html
WinPatrol - http://www.winpatrol.com/
If the above don't work, the only other thing to do is uninstall the software, reboot, reinstall.