First I'm going to rant and then I'm going to give you the Group Policy instructions. Scroll down now to skip the rant ;-)
Vista is much better than XP for this. If I forget to turn off automatic reboots that happen in the daylight, I get a popup that lets me postpone for as long as I want, not just ten minutes at a time - and I can't accidentally type something in another window that triggers the reboot. And so far, updates haven't reset the setting - though downloads like the Office 2007 search gizmo still reset the setting.
If you've had unexpected overnight reboots that killed a flickr upload or an MSDN download or just closed your open apps when you thought you'd told XP not to install updates without asking, check the Automatic Update settings (even if you already changed them) because some downloads from the Microsoft site change the settings for you. Let me say this to Microsoft one more time: this is a stupid idea. It changes the state of my machine without my knowledge or permission and could lose data. I don't care how much you think an automatic 3am reboot is good policy; while you give me the option to choose something else, you have to respect that and not use downloads to reset things so updates are installed automatically and get to reboot me. BAD MICROSOFT! NO BISCUIT!
The good news: you can use Group Policy to stop downloads making the change. I know this works for XP and I expect it to work for Vista as well; I'll be testing that out by rebooting tonight after installing the UNC search add-on (and let me say to the Microsoft search person who thought searching network shares shouldn't be built into Windows Desktop Search: you are way behind your users and the Home Server team. Never mind all those business users and block your ears to the SharePoint team saying network shares are a thing of the past; they're a wrong as the Exchange folk trying to kill public folders. A third of your Windows Server SBS sales are to HOME USERS. WiFi is huge. SyncToy is enormously popular. People have files on DIFFERENT MACHINES. Wake up! And yeah, NO BISCUIT!). Right, back to Group Policy.
If you don't already use this, GPEDIT.MSC is your friend. If you have XP Home, you have to do this in the registry, by hand. If you have a system admin at work you should talk to them instead; I'm describing local GPO editing which is a horse of a different colour from AD GPO. Obligatory warning; messing with policies and the registries can stuff your machine. Take a backup of the registry and if you don't know how to do that or how to find/change/create keys you probably shouldn't try this. This process isn't difficult, but you need to do it right.
1 Open the Group Policy Editor (GPEDIT.MSC), expand Computer Configuration, right-click Administrative Templates and choose Add/Remove Templates. If you don't see Wuau.adm, click Add and find the file in the WINDOWS\INF folder (in Vista I found you don't need this step; Vista users go to #2).
2 Look in Computer Configuration > Administrative Templates > Windows Components > Windows Update. Configure Automatic Updates is the important policy; select it, view the properties, choose Enable and you see the same settings as in the Automatic Update tab of System Properties (the Windows Update > Change Settings control panel in Vista). Pick the one you want; option 3, downloading updates automatically but getting the option of when to install them is what I recommend.
3 Vista users are done because the default are what you want; I wouldn't change anything else. For XP users there are several other useful policies here. To get rid of the restart prompt if the updates setting is changed again enable No auto-restart; change how long you get before the first prompt and between subsequent reminders by enabling Delay Restart and Re-prompt for restart. You can also stop Install Updates and Shut Down being made the default when you want to hibernate or restart instead.
3 XP Home users have to fire up the registry editor. Microsoft has a master list of the registry keys corresponding to Group Policy objects at http://download.microsoft.com/download/a/a/3/aa32239c-3a23-46ef-ba8b-da786e167e5e/PolicySettings.xls
The Configure Automatic Updates policy is equivalent to the registry key HKLM\Software\Policies\Microsoft\Windows\WindowsUpdate\AU\AUOptions - if it's not there create AUOptions as a DWORD and set it to 3.
The other keys listed in the spreadsheet are left as an exercise for the reader...