The error you're receiving when you try to access
http://connect says to me that your problem might be DNS related. But then you say that you can connect to the server using \\server\public\downloads which is even more confusing. I would suspect that the error you receive when you attempt to run launcher.exe from a USB stick is related to the
http://connect problem; it probably tries to use that URL to download its required files.
First things first, please confirm that your Windows 7 machine is receiving an IP address from the SBS DHCP server. Then please check whether you can access
http://connect from any other workstation (it doesn't matter whether they're domain joined or not).
Regards,
Ady