[rockheavy]

I had exactly the same problem (I posted it earlier on this thread).
It seemed that IE8 WAS the bad dude. In my case it was embedded into my version of XP. (it was not a update on IE7)
If you first installed SP3 and after that IE8, you must remove SP3 first, then remove IE8, then reinstall SP3. Also MS has a little program that does it for you.

I installed another version of XP (with IE7) and it runs fine now.