'Notify me but don't do anything automatic' just gives you the pop-up balloons. No surprise reboots, but annoying little pop-up balloons and sudden bandwidth hogging. 'Download updates for me' will automatically download the updates, but it won't install them until you say so. Although if you leave your PC on, you can set the time to download and reboot in the middle of the night.
'Automatic' is the one that may reboot your computer when you're not looking. In Windows XP, right-click on My Computer and choose the Automatic Updates tab. On the left side of the panel, click change settings. Go to Windows Update by clicking the start button, choosing all programs, and then clicking Windows Update. I'll show you how to turn off the automatic updates, only if you promise to manually keep up with the patches! We don't need another zombie-Windows-machine botnet out there.
The updater is always prompting you, or even automatically rebooting your system when you walk away for a moment. They keep your system patched, so you should probably leave the updater on. Windows automatic updates are a good thing.