p2 is complaining because it cannot satisfy installing two versions of 
"update".  The key aspect to your message is:

> Cannot satisfy dependency:
>   From: Product 1.0.12.201107012042 (product 1.0.12.201107012042)
>   To: update.feature.group [1.0.12.201107012042-4-7Z7B5885Q58B5HB]

Dependencies specified by a .product file are encoded with an exact version, 
and so your product is now fixed to that exact version of your "update" 
feature.  

Andrew Niefer has a few blog articles on why this happens and how to work 
around it by instead specifying your dependencies in an accompanying p2.inf 
file:

   
http://aniefer.blogspot.com/2009/07/composing-and-updating-custom-eclipse.html
   http://aniefer.blogspot.com/2009/07/adt-part-2-more-like-epp.html 

Brian.
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