Yes, group policy has been checked and the WUS diagnostics tool shows that the settings are being applied to the workstations.

we're on a standard ethernet network.

Yes, I'm aware of the service packs needed and we are up to XP service pack 2 on most while 200 is sp4.

Could well be a server side problem but i'm stumped as to what it could be! I was wondering whetehr setting up another server with a different website (other than the default one) so see if its something wrong with IIS but not sure if this would be worth doing.