You could stop that dialog from coming up (until you manually restart) by going to start -> run... and typing the following.
net stop wuauserv
and hitting enter. This turns off the Automatic Updates service. Since the service is configured to turn on automatically (assuming you use automatic updates) it will turn back on automatically when you reboot manually.
I should have thought of that before I posted this thread, but the dialog is still a pain if you're not expecting it.
edit: type net start wuauserv if you want to turn it back on.
Edit 2: There's a discussion about this at
http://asymptomatic.net/2005/08/11/831/how-to-disable-that-blasted-restart-now-message-from-windows-update
Interestingly enough, there's a group policy setting that will disable that dialog completely. I configured my system just now for this so we'll see how good it works. In the link above, scroll down and take a look at Colin Findlay's post about gpedit.msc
I just keep finding more stuff! When you make a change in Group Policy, it requires a reboot to take effect. However, if you are running XP Pro, you can go to start -> run and type the command
gpupdate.exe /force
and hit enter to force an update to group policy without a reboot. This doesn't work in XP Home however.