As of now (12/21/2008), this amazing fix described below no longer does the trick.
XP SP3 is completely flaky once again.
Ugggg!!! (Banging head against wall.)
Microsoft continues to update and support Windows XP, fortunately.
One way to install Windows XP SP3, is to let your windows updates do it the old-fashioned way. Then one day your computer will wake up and find it has done so. This is what I did and usually do for updates, but after my mother's computer basically died after SP2, I was wary. I let SP3 sit there a few months before letting it install on my computer. After running fine on my computer for awhile, I tried it on my wife's. Hell.
For the past few month's her computer running XP professional SP3 had issues: XP Professional SP3 won't shutdown or go to standby.
After installing XP Professional SP3 on my laptop from windows update, the laptop won't consistently shutdown or go to standby. It will do so the first time after closing the screen, but not the second or more time. It gets stuck on a blue screen saying "preparing to standby".
I brought this up with Dell support who helped me (during the final week of the laptop's warranty) and concluded after some time: uninstall SP3. Yeah, right.
I searched the web several times and didn't find anything helpful. Hence, this post.
Today I contacted the big boy. If you didn't know it, Microsoft has free support for Windows SP3. Who get's anything for free nowadays?
To summarize, after over an hour of a chat where most of the time I read email, vacuumed the house, and waited while installer and uninstaller ran, I have the answer.
Download the SP3 installer to your desktop. It's a big file.
Go to your control-panel, select Add/Remove Programs and uninstall Windows SP3. This will take some time, since Safe Mode lives in a parallel universe where time moves slooowly. Reboot when it tells you to.
Check if things are OK. (You are on your own here.)
Now reboot in Safe Mode (hit F8 while booting up, then select Safe Mode)
It works for me now.
Thanks to Vinod from Microsoft, presumably in India, who even called me after the computer was all tucked-in and sleeping normally just to see if I was OK.