I noticed on a new build of windows server 2003 I could not get the updates downloading from WSUS no matter what.
Then I noticed that for the first time I'd made a disk with two partitions and had not formatted the second one (D: drive).
As soon as I did this WSUS downloads worked! (after wuauclt /detectnow)
However i'm yet to discover whether it would do the same on a non vmware server.
But just in case someone else has the problem...