Running Windows Update inside Windowx XP Mode

I am working on a Win 7 Ultimate machine, and was using XP for some development tasks (for compatibility checks). Everything worked like a charm on the XP, including updates.

Two days ago I had to switch computer (mainly a new motherboard/cpu), and I had just stuck my old HD inside the newer case. Win 7 worked like a charm - installed all the new drivers, identified everything automatically, no sweat. The trouble started when I tried running my old XP mode - it won't launch, complaining about the cpu change. I figured it's not a big deal, and I deleted the VM, and re-ran XP mode. It told me it can't find it, and offered to create a new one, just what I wanted.
I had finished setting up the new XP mode VM, and it seems to work just fine. Got it to use the host network adapter, so I can surf from "inside". But I can't get Windows Update to run. Whenever I click on the "Custom" button on the WU site, after a short while, I get the [Error number: 0x80072EFD] page.

I tried several solutions from around the web for it (clearing some cache and restarting the wuauserv, even a microsoft fix-it run), but still nothing seems to work.

At this point in time IE8 appears to be a must -- I had the same issue, and WU started working after I updated IE6 to IE8.

Prior to that, I updated the update agent and installer (WindowsUpdateAgent30-x86-7.6.7600.256-257 & WindowsXP-KB942288-v3-x86) and manually set my LAN connection.