The Standards Blog lists several articles covering this story, but here’s the basic summary. The service pack was released for Microsoft Office 2003 to make it easily to interoperate with Windows Vista and to read Microsoft’s new (troubled and broken) OOXML format that is the default in Office 2007. The catch? The service pack quietly “made a range of older files inaccessible, including Word documents, Excel spreadsheets and PowerPoint presentations”. These formats are about 10 years old or more, so, while they aren’t commonly used for recent documents, “blocking of them will make retrieval of archived material more difficult”. (from CNET article)
There is a confusing workaround available (KB 938810), or you could always re-install Microsoft Office as some users have resorted to doing. Microsoft cites security concerns, which are valid, but forcing the blockage with the service pack (no option not to block if a user has large archives in old formats, or even a notification that the service pack will make those files unreadable) is just plain obnoxious.
This is another strong reason to use open standards as opposed to Microsoft’s proprietary formats.