Bringing up my dead post here...
I recently looked back into this with my Group Policy and I noticed that I had a GPO that had this setting enabled: "Computer Conf > Policies > Admin Temps > System/Internet Communication Management/Internet Communication settings > Turn off access to all Windows Update features" and this was set to Enabled. I am wondering if this perhaps played a part with my WSUS server's continual connection error...
Here is the descritpion, "If you enable this policy setting, all Windows Update features are removed. This includes blocking access to the Windows Update website at http://windowsupdate.microsoft.com, from the Windows Update hyperlink on the Start menu, and also on the Tools menu in Internet Explorer. Windows automatic updating is also disabled; you will neither be notified about nor will you receive critical updates from Windows Update. This policy setting also prevents Device Manager from automatically installing driver updates from the Windows Update website."
According to the description, it is removing access to the Windows Update site, but it doesn't say anything in there about a local WSUS server.. so I would think a local WSUS would still work even if this setting is enabled.
Anyway, I am removing this setting and will try WSUS out again. I temporarily gave up on the project as I had continual connection issues, despite following technet setup guides and attempting to install the role on 3 different servers in an attempt to get it working. All failed..
Hopefully that will be it.
Actually, now that I think about it (after several hours of posting this and over a month since the original post) I believe the WSUS server was in an OU which had that GPO applied, thus I assume it was unable to reach windowsupdate.microsoft.com. Seems obvious to me now after such an unacceptably long time. Good lord I should let go for incompetence.