I went back to the sysprep system and added a wired driver, so I had access to the internet and to let me go through the same scenario to see what searching for updates would say. It did not complain about the LCU rollup. It did a lot more checking for partial installs on the rollup sub-packages though.
Partial install line alone is not very informative lines before/after for the specific pakage might help
I finally put a finger on what is causing this. It has to do with the WMF 5.1 installation that is being installed later at OOBE. After the installation and reboot. the rollup shows up in WU again. So, it looks like the Rollup needs to done after installing WMF5.1 If I recall correctly, WMF51 can't be integrated offline in W7. I think I tried installing it online on the sysprep system quite a while back and had problems with it so I ended up installing it online as the last update. Thanks for the helpful tips.