The reason this is happening is probably that Windows "Office Source Engine" Service has been disabled. Suggest you right click on My Computer, open up "Services" under "Services and Applications" and double click on the "Office Source Engine".

1. Set the Startup type to be Automatic
2. Manually start the service.

Unless I'm very much mistaken, you will find that any current and future office updates will install without any further complaint. Reinitialising Office as others have suggested will fix the problem, but it's a bit of a sledgehammer solution.

Regards
Martin