I strongly believe this error is due to a firewall or watchgaurd type technology. I got this error when I was not authenticated onto our watchguard to view certain file types. After I authenticated myself as having the privalges to download files from the web, Windows Update went on without error.
Yes that was it. I turned off the "Deny ActiveX applets" from the http proxy setting page . Oh and i have an X500 Firebox. By the way, the way watchgaurd default settings were setup for "http" have given me more trouble then good. Thanks to above for the info it would ahve taken me forever to figure out why Windows update didnt work.