When an XP repair CD is used, it replaces all system files (including Windows Update) on your machine with older versions of those files and restores the registry. However, the latest version of Windows Update includes wups2.dll that was not originally present in Windows XP. Therefore, after the repair install of the OS, wups2.dll remains on the system but its registry entries are missing. This mismatch causes updates to fail installation.
Clinton posted some information on how to manually fix this bug. However, it's not the type of solution a general Windows user would feel comfortable with doing by himself.
While the company may have had the users’ best interests at heart when pushing out the updates, this issue highlights why it is important that Microsoft doesn't force undocumented updates upon users, but rather let people wait, do some testing, and decide whether they need to install the update.