It does not appear to be critical, merely informational. If you have already activated
Windows, you won't even see it.
Try the "Notify me but don't automatically download or install them" section on the
following page to decline that update. After it has been declined, you should be
able to reset update to auto. Note the page is for xp, so you may need to look around
a bit to do this.
http://support.microsoft.com/kb/306525/en-us
If you want to determine WHY it will not install:
http://support.microsoft.com/kb/822798