1. Any folder on Windows XP which is compressed shows is blue (Windows default compression is used to save more space on the hard drive).
2. You stated the windows update is stored in the system32 directory that is in correct they are stored in the C:\WINDOWS\$hf_mig$
3. Updates are downloaded in \WINDOWS\SoftwareDistribution\Download
4. Best bet would be download and install CCLEANER which has a feature to clean these among other temporary files.
http://www.piriform.com/ccleanerOR
http://www.filehippo.com/download_ccleanerThe $NtServicepackunistall$ and $hf_mig$ folders are backups of system files that were replaced when you installed various hotfixes including service packs for the operating system. The $NtServicePackUninstall$ folder contains the backup copies of system files that were replaced when you installed Service packs. These are only needed if you decide to remove Service pack for some reason. If your system is stable, and you don't need to remove the hotfixes or service packs, then these folders can be removed.
However we won’t suggest in removing the folders, since they may be needed when you make certain changes to your system. These files are used if the system detects (System File Protection) that a system file has been replaced by an incorrect version, or deleted. If you remove this folder, and the system needs to replace a corrupt, replaced or deleted file, it won't be able to find its backup copy.
You can try to delete the temporary folders and other files by running the disk cleanup.
DO NOT delete the actual folder delete the files and folders with in. For some reason windows update does not work properly if those directories are not there.