It's set to update every day at 3.00 am. What happens if it isn't on a that time? Does ii check for updates the first time it opens after that or does it wait until it's on at 3 am some time in the future?
Windows will check for new updates whenever you're online and install them using your automatic updating settings.
For more info about Windows Update check the FAQ: http://www.microsoft.com/windows/downloads/windowsupdate/FAQ.mspx
Windows 7 checks for updates on a daily basis whenever it can. It will aim to do it around the time you have set but won't keep to that strictly.
It will download the updated in the background (if you've got it configured to do so) and will notify you when this is complete (if the updates require a restart).
I've seen it install updates by itself at random times during the day if they do not require restarts.