In KB article Q154538 Microsoft asserts that a "WinNT 4.0 Upgrade CD Will Not Upgrade WinNT 4.0". I have had some success by first editing:
and changing CurrentVersion to 3.5.
Double Click SystemSetupInProgress and set it to 0. Do the same for:
NOTE:It is best to uninstall SP2 or SP3 prior to an update install. If you have RAS installed you must uninstall the SP. If you can not uninstall, then:
expand <cd-rom>:\i386\tcpip.sy_ %systemroot%\system32\drivers\tcpip.sys prior to doing the update install. The note is also applicable to installing RAS after SP2/SP3.