Today I ran into an issue where the Build And Capture hung on Downloading update 1. Some googling lead to a known issue in ConfigMGR 2007 SP2 and there is a patch to solve the issue.
http://support.microsoft.com/kb/2509007
Once I installed the patch Software updates were downloaded and installed to the capture computer. This issue seems to affect only Windows 7 captures and with software update packages containing more than 80 patches.
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