Will Autoamtic updates download the full IE7 installation BEFORE a user accepts installation?
Yes it will.
In the past, installing Internet Explorer required downloading a "stub" that would then download and install Internet Explorer.
This behaviour has changed for IE7. As noted at this URL:
http://www.microsoft.com/technet/updatemanagement/windowsupdate/ie7announcement.mspx
"Automatic Updates will notify all such users (including those with Automatic Updates configured to automatically download and install updates) when Internet Explorer 7 has been downloaded and is ready to install."