I have Automatic Updates set to 'notify mode'. When new hotfixes become available, I'm able to select the ones I want to download. However, they are never downloaded and the little golden shield icon in systray just disappears, appearing only when new updates are found (ie the ones i haven't selected to download, yet).

This happens on both machines I used nLite on. I didn't remove ANY component - I just used nLite to integrate some update packs and hotfixes, to create winnt.sif file for unattended install and to apply some patches+tweaks.

Deleting SoftwareDistribution folder didn't help...

I'm attaching only one .ini file, it is very similar to the one of the other machine.

EDIT: Oh, and I used Booogy's WMP11 integrator to integrate windows media player 11 (tweaked version) on the first machine, and Booogy's vanilla wmp11 addon on teh second one. I doubt that this had any impact, however...

I think I have found the cause (after many tests and vmware installations). It seems that the hacked SFCFILES.DLL file makes automatic updates unable to download anything, at least when they are set to notifying about new hotfixes. nLite modifies this file when you enable any of the patches (which modify files such as tcpip.sys or uxthemes.dll), maybe even on some other occassions.

Thanks for posting this. I didn't realize this was a problem until I read your post.
But indeed this seems to be a problem. Thanks again.

BTW I usually run as a Limited user with Automatic Updates Elevate non-Admins.
But I'm seeng this problem when I'm running as Administrator also.

Do you both leave SFC/WFP on, not disabled?

Can someone with disabled SFC say the same?

I think I have to take back what I said - I used the original sfcfiles.dll from wxp cd and I still experience the problem on my virtual machine. It seems that the patches themselves are causing the problem, tcpip.sys would be my guess as one high priority update on WU/MU contains its newer version. I'm going to test some new installations and combinations of patched/unpatched tcpip.sys, uxthemes.dll and sfcfiles.dll. SFC is turned ON on all my machines. I also use Ryan's newest update pack (2.1.7).

This is probably not nLite specific problem as there are many other ways to apply these patches. tcpip.sys v5.1.2600.2892, contained in the official security update is completely superceded by v5.1.2600.2956 in Ryan's update pack. Patching this newest QFE version of tcpip.sys might cause this problem. Oh, and when I started my notebook (the second machine), it offered me to install the updates - after 5 days... weird.

Ok, let me know of your findings, I'll be ready to help, my brother's pc has the same issue.