Due to the number of updates on this issue, I have included them at the top... below is them is the original blog...
Update: MSoft has written a vbs script to do the same as what I have listed below. The main difference is that you do not need to hunt through pending.xml - look at http://support.microsoft.com/kb/975484 for more info.
Update: MSoft has redone how WSUS rolls out w07sp1 - "Packages have been updated to address a known issue." http://support.microsoft.com/kb/894199 which might help this issue. Note that this does not appear to be a change in sp1, but in the wsus rollout format...
Update: MSoft has released Remote Adminsitration Tools that work with SP1 -> http://www.microsoft.com/downloads/en/details.aspx?FamilyID=7d2f6ad7-656b-4313-a005-4e344e43997d
Further Notes on issues with w07 sp1 in general: http://www.infoworld.com/t/microsoft-windows/what-you-need-know-about-windows-7-service-pack-1-699
Fur
Recently rolled out SP1 to our wee test group on WSUS. While it worked for most, one machine simply refused to boot, giving the BSOD (black screen of death) with "Fatal Error C0000034" as witnessed below...

Before I lay out what worked for us, let me give credit where credit is due - specifically to "thewoot" -> you can see his post here. He also mentions that you can send him money via paypal if you want to say thank you in a practical way - considering the potential costs to your organization I don't think that is a bad idea at all...
Here are his steps (with some notes of changes...)
1 - Reboot your computer with the Windows 7 disc in the drive
2 - Select "Launch Startup Repair"

3 - !!! Cancel the "repair"
4 - Click on "Don't Send" (if they don't know by now...)

5 - !!!! Click on the link "View advanced options for recovery and support"

6 - Click on the "Command Prompt" link at the bottom.

7 - When the command prompt opens, type "Notepad" to launch notepad. Note this MIGHT work with Wordpad (type "Write" to launch) but I have not tried it
7a - fyi - if you need to get files off (just in case) you can put in a USB drive and start transferring files to it. You can either use the command prompt, or the File/Open dialog of Notepad to move the files...
8 - You are going to be looking for the pending.xml file for the installation. Please note that it might be on D: not C: because of the System partition that Windows 7 sets aside. DO NOT FREAK OUT IF YOU GO TO C:\ AND THERE IS NO WINDOWS, GO TO D: IN THIS CASE
9 - Use File/Open to browse to (either C: or D:, see above) and \windows\winsxs\. Make sure to have "All Files(*.*)" selected in the bottom right so that you can see the xml files.

10 - Make a copy of pending.xml by dragging it down in the file/open screen (just because we are paranoid)
11 - Open up pending.xml. This will take a LONG time because it is a LARGE file. Just be grateful Notepad can handle it.
12 - Do a search for 000000000000.cdf-ms. This is the section you are going to remove.
13 - Delete the section that includes it. In thewoot's directions he has you start with the <Checkpoint/> file BEFORE it and continue through to the end of the section that contains it, as he points out, the text may vary slightly... This will take a while (big file)...
<Checkpoint/>
<DeleteFile path="\SystemRoot\WinSxS\FileMaps\_0000000000000000.cdf-ms"/>
<MoveFile
source="\SystemRoot\WinSxS\Temp\PendingRenames\e56db1db48d4cb0199440000b01de419._0000000000000000.cdf-ms"
destination="\SystemRoot\WinSxS\FileMaps\_0000000000000000.cdf-ms"/>
14 - SAVE THE PREVIEW.XML FILE!!! This will take a while (big file)...
15 - Close notepad
16 - Exit the command prompt (type 'exit' or just close).
17 - Select Restart...

16 - It may take a bit to boot up. In our case the install 'failed' (woohoo!!!) but in other cases it might claim to 'succeed' whatever that means at this point...

So what does this all mean? I know that it is instinctual to blame MSoft, but I suspect this has to do with a 3rd party changing files. I say this because this installed fine on a number of boxes but failed on someone who does graphic design. It is quite simply impossible for MSoft to test all the various scenarios that exist in the entire world, so I am giving them some slack. As long as they fix it quickly!
What are the takeaways that I get out of it?
- ALWAYS testbed your updates. This is a no-brainer, or should be, but sometimes admins tend to assume that simple because it works 99% of the time it will work 100% and this simply is not true. I know there is a LOT of other stuff to do, but do not blame MSoft because they cannot test EVERY SINGLE situation.
- The larger the update the more testing. I installed this on a couple of boxes BEFORE I rolled it out to my testbed. Then I waited a bit. Because I was so careful I only had to repair one computer rather than who knows how many...
- Have a beer... there are far greater catastrophes happening even as you read this, be grateful that this is not one of them...
Hope that helps...