DTracy,
Good thinking, but we did check the firewall and it is turned off.
I took it one step further, I put one of our Windows 2000 Professional machines in the same OU, the GPO never updated to the Win2K machine either. I made sure that the GPO is linked to the Domain OU, with no override set for the GPO on the Windows XP OU.
Just guessing, I think it is an issue with the Link between the GPO and the OU, but I have triple checked my settings, and pulled out all of my hair.