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I dont think the pop-up has got anything to do to prevent the installation of sp2.We can check that later.
According to the MS-KB article..
Code:
This behavior may occur if your computer has a modified version of the Ntoskrnl.exe file that uses the /KERNEL switch in the Boot.ini file. This condition may exist because your computer has a third-party program installed that customizes the graphics that are displayed when your computer starts up. Third-party programs that can cause this condition include the following:
• BootXP
• LogonUI Boot Randomizer
If you have any of the customised applications then uninstall them & try installing sp2,if not then post your boot.ini file here
Right-click MY computer>Properties>Advanced>Under start-up & recovery>settings>Edit>Save the file & post it here.
Otherwise manually search for the file & do the same.