But hey, something needed to be done to stem all those worms and virus problems out there right?

Of course something had to be done. And of course, until now Microrsoft were there own worst enemy. Their operating system was wide open by default, unless you knew how to lock it dowm. So of course suppliers good (eg Groove?) and bad (eg virus writers) exploited every loophole.
But MS has a real political problem upgrading Operating Systems. The momentum in previous release means that up and coming OS releases (and SP2 should have been a new OS, imo) are rejected by the community rather than welcomed. But rejection comes from more than just momentum. It comes from distrust.

Increasingly MS is pushing the boundaries of distrust. Whether it be the merits of MS-Passport, "trustworthy computing" or this latest "security" initiative. Whatever MS does it seems to be able to fall well short in managing customer relations. It continues to treat general users as something close to being untrustworthy.

With SP2 they decided they could not trust users to install SP2 and so took the unilateral decision that if they did not force it down people's throats then it would not be adopted. Mr Gates also put direct pressure on the release method by indicating that MS would fundamentally deal with virus & spam in a short time frame.

The upshot of this is that suppliers are quaking in their feet over this particular downgrade. I use that last word advisedly: SP2 is not an expansion of functionality - it is a contraction of any networking app.

Suffer colleagues, suffer.