What I do is to pre-download the larger updates: Any Service Packs, Windows Media Player, DirectX (web), Internet Explorer, .NET 3.5 / 4, etc. and have those available on the network/usb/dvd to speed up the installation. Once those are out of the way, I let Windows Update work the magic for the rest of the missing updates. Seems to be about the best of both worlds for me.
For the MS Office 2007/2010 versions, Microsoft has added a folder to the install directory called Updates that you can drop the various service packs and updates in. While the installer is running, it will automatically include those patches during the install process.