Problem: In the Server Management Panel of SBS 2003 the server is reporting that update services are not running because it automatically turns off if you customize Windows Server Update Services.
Solution: This message was a pain to troubleshoot because at first glance the settings were not altered. However, if you installed WSUS 3.0 (update services 3 upgrade) you can replicate the same issue.
This is the link to the correct Microsoft solution for resolving this issue: http://support.microsoft.com/?kbid=945985
Use Method #1, after applying Steps 1-4 and confirming the update service is running, return to Server Management > Update Services and click “refresh”
If you receive a Bad Request error, then your Internet Information Service for the default site is not running.. Go to Server Management > Advanced Management > Internet Information Service > Server > Web Sites > Default Web Site – Ensure the IIS is running for that site.