Could the balloon have been just a leftover notification but as I just did a restart whatever needed to install did install?? Yes that's all it was,information.
Windows installer is shown with full access under program permissions however did my tight firewall setting interfere with “critical updates”?? i think not but you may get a better answer from someone by asking here;AntiVirus, Firewall. WU may change your firewall settings tho' in some cases.
If I do nothing what’s the worst that could happen? You will not have the latest Security updates and patches for windows.
How do I see what updates are waiting to install? I know SP3 is there but that is a whole different issue.
First see Using Windows Update in XP
Start >> Windows Update
In XP's Windows Update applet, click "Review your update history"