Here is the thing I just recently ran into. In my portal, there is a site with custom list and a SharePoint Designer workflow that was starting automatically on “Item Update”. All of a sudden I realized that this workflow does not start automatically any more. You could still start the workflow manually, but it’s not a fix. The good part is that I’ve upgraded to SP1 fairly recently and it was not a problem to track back and find out when workflows stop working properly. SP1 had a lot to do with it.This behavior I by design and occurs because of a security fix in Windows SharePoint Services 3.0 SP1, the fix prevents declarative workflows from starting automatically under the system account. After you install Windows SharePoint Services 3.0 SP1, declarative workflows will not start automatically if the following conditions are true:
1. The Windows SharePoint Services Web application runs under a user's domain account.
2. The user logs in by using this domain account.
3. The site displays the user name as System Account.
Here is the link to the solution http://kbalertz.com/947284/declarative-workflow-start-automatically-after-install-Windows-SharePoint-Services-Service.aspx\