This means that the computer is a part of a domain. You can't capture a machine if it's part of a domain. My task sequence was like this:
As you can see this is a very simple task sequence. It just captures my built machine and stores it on my distribution point. I don't like the "Build and Capture" style task sequence. This way offers me far more flexibility in my opinion. It's just far less automated.
To fix the issue you need to simply add a 'Join Domain or Workgroup' step before everything else. So your task sequence will look like this:
The next screenshot shows a successful join to the workgoup.
The next screenshot shows the part of the task sequence that failed before. You'll notice the line "Local Machine is not part of a domain."
All done. A simple fix for a simple problem.