WSUS 3.0 will not register workstations

I've installed WSUS 3.0 SP2 on a SBS 2003 server. I have a mixture of XP and Win7 workstations.

I've applied a group policy on the workstations, all which are in a OU.

When I go to the console, I can't see any of the workstations.

When I troubleshoot the workstations, the GPO has taken as it shows it. However the one thing I see is when I do a Diagnotistics with WSUS client utility it indicates the WSUS is 1.0 and not 3.0.

No where on the server can I see version 1.0

Thanks.

Gary