Contributed By: Mark Burneskis
Below is the reply I got from Microsoft and it fixed my issue.

I am sorry to hear that SUS server cannot synchronise with the Microsoft update server.

Please try the following steps.

1. Gather MPS reports, look at SETTINGS.TXT (The MPS Reporting Tool is utilized to gather detailed information regarding a systems current configuration).
    
2. Look at the CabPoolPath line. It may be incorrect or missing SUS installs the content path in the local drive with the most free space. IE: c:\SUS\Content\Cabs
    
3. Navigate to your SUS directory and note the path to the Content\cabs directory.
    
4. Modify the SETTINGS.TXT file to reflect the proper CabPoolPath:
   (The SETTINGS.TXT file is located in c:\Inetpub\wwwroot\autoupdate\dictionaries by default.)
    
5. The CabPoolPath line should look like: CabPoolPath,C:\SUS\Content\Cabs
    
6. Save the file, then restart the SUS Synchronization service.