Nice question. Though I'm surprised at the high percentage of incorrect answers.

Also, the disclaimer can be removed. This behaviour of the UPDATE statement is how the ANSI standard prescribes it to behave, Any other result, in any version of SQL Server (or even any other relational database) would qualify as a bug. And a severe one.

THe UPDATE should work as if all the results are computed first (based on the old information), and then all rows are updated with the new values instantaneously. That's not actually possible in current technology, but the effect should be the same as if it were possible.