WSUS KB2720211 failures

pulling my hair out over this one. Followed all the Microsoft blogs and suggestions. Reinstalled IIS and WSUS 3.0SP2. (2008SP2 machine) - many times. Quite skilled in something I don't want to be skilled in....  Can get WSUS 3.0SP2 to work and sync successfully, but as soon as I install latest KB2720211 I get sync error as follows: It is going through a proxy server BUT same error if I bypass proxy server.

"Response is not well-formed XML" - response is not well-formed XML. ---> System.Xml.XmlException: '', hexadecimal value 0x1F, is an invalid character. Line 1, position 1.

extract from C:\Program Files\Update Services\LogFiles\SoftwareDistribution.log, this points to something wrong in the IIS part doesn't it?

Seriously loosing the plot here :-(

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2012-09-04 00:24:50.267 UTC    Info    WsusService.22    WebServiceCommunicationHelper.GetProxyConfiguration    Use Proxy: 10.251.33.80:8080
2012-09-04 00:24:50.439 UTC    Info    WsusService.22    AuthorizationManager.GetUpstreamServerUriHeader    Found config says USS is MU site
2012-09-04 00:24:51.861 UTC    Info    WsusService.22    ServerSyncLib.GetWebServiceProxyInternal    Found config says USS is MU site
2012-09-04 00:24:52.002 UTC    Error    WsusService.22    ClassFactory.CreateInstance    Received TargetInvocationException from ClassFactory call: Exception has been thrown by the target of an invocation.
   at Microsoft.UpdateServices.Internal.ClassFactory.CreateInstance(Type type, Object[] args)
   at Microsoft.UpdateServices.ServerSync.ServerSyncLib.GetWebServiceProxyInternal(UpdateServerConfiguration serverConfig, WebServiceCommunicationHelper webServiceHelper, Boolean useCompressionProxy)
   at Microsoft.UpdateServices.ServerSync.ServerSyncLib.GetWebServiceCompressionProxy(UpdateServerConfiguration serverConfig, WebServiceCommunicationHelper webServiceHelper)
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.RetrieveSubscriptionData()
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.ExecuteSyncProtocol(Boolean allowRedirect)
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.CatalogSyncThreadProcess()
   at System.Threading.ThreadHelper.ThreadStart_Context(Object state)
   at System.Threading.ExecutionContext.runTryCode(Object userData)
   at System.Runtime.CompilerServices.RuntimeHelpers.ExecuteCodeWithGuaranteedCleanup(TryCode code, CleanupCode backoutCode, Object userData)
   at System.Threading.ExecutionContext.RunInternal(ExecutionContext executionContext, ContextCallback callback, Object state)
   at System.Threading.ExecutionContext.Run(ExecutionContext executionContext, ContextCallback callback, Object state)
   at System.Threading.ThreadHelper.ThreadStart()
2012-09-04 00:24:52.064 UTC    Error    WsusService.22    CatalogSyncAgentCore.ExecuteSyncProtocol    System.TypeInitializationException: The type initializer for 'Microsoft.UpdateServices.ServerSyncWebServices.ServerSync.ServerSyncProxy' threw an exception. ---> System.InvalidOperationException: Response is not well-formed XML. ---> System.Xml.XmlException: '', hexadecimal value 0x1F, is an invalid character. Line 1, position 1.
   at System.Xml.XmlTextReaderImpl.Throw(Exception e)
   at System.Xml.XmlTextReaderImpl.Throw(String res, String[] args)
   at System.Xml.XmlTextReaderImpl.Throw(Int32 pos, String res, String[] args)
   at System.Xml.XmlTextReaderImpl.ThrowInvalidChar(Int32 pos, Char invChar)
   at System.Xml.XmlTextReaderImpl.ParseRootLevelWhitespace()
   at System.Xml.XmlTextReaderImpl.ParseDocumentContent()
   at System.Xml.XmlTextReaderImpl.Read()
   at System.Xml.XmlTextReader.Read()
   at System.Xml.XmlReader.MoveToContent()
   at System.Web.Services.Protocols.SoapHttpClientProtocol.ReadResponse(SoapClientMessage message, WebResponse response, Stream responseStream, Boolean asyncCall)
   at System.Web.Services.Protocols.SoapHttpClientProtocol.Invoke(String methodName, Object[] parameters)
   --- End of inner exception stack trace ---
   at System.Web.Services.Protocols.SoapHttpClientProtocol.Invoke(String methodName, Object[] parameters)
   at Microsoft.UpdateServices.Internal.ApiRemoting.GetServerVersion()
   at Microsoft.UpdateServices.Internal.DatabaseAccess.AdminDataAccessProxy.GetServerVersion()
   at Microsoft.UpdateServices.Internal.BaseApi.UpdateServer.CreateUpdateServer(String serverName, Boolean useSecureConnection, Int32 portNumber)
   at Microsoft.UpdateServices.Internal.BaseApi.UpdateServer..ctor(Boolean bypassApiRemoting)
   at Microsoft.UpdateServices.Internal.BaseApi.UpdateServer..ctor()
   at Microsoft.UpdateServices.Internal.WebServiceCommunicationHelper.InitializeSslServerValidation()
   at Microsoft.UpdateServices.ServerSyncWebServices.ServerSync.ServerSyncProxy..cctor()
   --- End of inner exception stack trace ---
   at Microsoft.UpdateServices.Internal.ClassFactory.CreateInstance(Type type, Object[] args)
   at Microsoft.UpdateServices.ServerSync.ServerSyncLib.GetWebServiceProxyInternal(UpdateServerConfiguration serverConfig, WebServiceCommunicationHelper webServiceHelper, Boolean useCompressionProxy)
   at Microsoft.UpdateServices.ServerSync.ServerSyncLib.GetWebServiceCompressionProxy(UpdateServerConfiguration serverConfig, WebServiceCommunicationHelper webServiceHelper)
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.RetrieveSubscriptionData()
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.ExecuteSyncProtocol(Boolean allowRedirect)
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.ExecuteSyncProtocol(Boolean allowRedirect)
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.CatalogSyncThreadProcess()
   at System.Threading.ThreadHelper.ThreadStart_Context(Object state)
   at System.Threading.ExecutionContext.runTryCode(Object userData)
   at System.Runtime.CompilerServices.RuntimeHelpers.ExecuteCodeWithGuaranteedCleanup(TryCode code, CleanupCode backoutCode, Object userData)
   at System.Threading.ExecutionContext.RunInternal(ExecutionContext executionContext, ContextCallback callback, Object state)
   at System.Threading.ExecutionContext.Run(ExecutionContext executionContext, ContextCallback callback, Object state)
   at System.Threading.ThreadHelper.ThreadStart()
2012-09-04 00:24:52.127 UTC    Info    WsusService.22    CatalogSyncAgentCore.UpdateSyncResultAndGenerateReportingEvent    CatalogSyncThreadProcess: report subscription Undefined error class or Success
2012-09-04 00:24:52.174 UTC    Info    WsusService.22    EventLogEventReporter.ReportEvent    EventId=386,Type=Error,Category=Synchronization,Message=Synchronization failed. Reason: The type initializer for 'Microsoft.UpdateServices.ServerSyncWebServices.ServerSync.ServerSyncProxy' threw an exception..
2012-09-04 00:24:52.236 UTC    Error    WsusService.22    CatalogSyncAgentCore.CleanupAfterSync    Unable to set Last Run Information because Subscription is not loaded
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.CleanupAfterSync(DateTime currentSubscriptionStartTime, Boolean isStartEventReported, Boolean didRedirect)
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.ExecuteSyncProtocol(Boolean allowRedirect)
   at Microsoft.UpdateServices.ServerSync.CatalogSyncAgentCore.CatalogSyncThreadProcess()
   at System.Threading.ThreadHelper.ThreadStart_Context(Object state)
   at System.Threading.ExecutionContext.runTryCode(Object userData)
   at System.Runtime.CompilerServices.RuntimeHelpers.ExecuteCodeWithGuaranteedCleanup(TryCode code, CleanupCode backoutCode, Object userData)
   at System.Threading.ExecutionContext.RunInternal(ExecutionContext executionContext, ContextCallback callback, Object state)
   at System.Threading.ExecutionContext.Run(ExecutionContext executionContext, ContextCallback callback, Object state)
   at System.Threading.ThreadHelper.ThreadStart()
2012-09-04 00:24:52.314 UTC    Info    WsusService.20    ThreadEntry    ThreadHelper.ThreadStart
2012-09-04 00:24:52.345 UTC    Info    WsusService.20    CatalogSyncAgent.WaitUntilSyncFinishedOrCancelled    Agent signalled done.
2012-09-04 00:24:52.392 UTC    Info    WsusService.20    CatalogSyncAgent.SetSubscriptionStateWithRetry    Firing event SyncFailToStart...
2012-09-04 00:24:52.502 UTC    Info    WsusService.20    CatalogSyncAgent.WakeUpWorkerThreadProc    Found no more jobs. CatalogSyncAgent quits but will run rollup before terminating ...
2012-09-04 00:24:52.580 UTC    Info    WsusService.20    CatalogSyncAgent.UpdateServerHealthStatusBasedOnError    ServerHealth: Updating Server Health for Component: CatalogSyncAgent, Marking as Not Running
2012-09-04 00:24:54.377 UTC    Info    WsusService.7    SusEventDispatcher.TriggerEvent    TriggerEvent called for NotificationEventName: RollupAgent, EventInfo:
2012-09-04 00:24:54.455 UTC    Info    WsusService.23    ThreadEntry    ThreadHelper.ThreadStart
2012-09-04 00:24:54.502 UTC    Info    WsusService.23    SusEventDispatcher.DispatchManagerWorkerThreadProc    DispatchManager Worker Thread Processing NotificationEvent: RollupAgent
2012-09-04 00:25:00.611 UTC    Info    WsusService.24    ThreadEntry    ThreadHelper.ThreadStart
2012-09-04 00:25:00.658 UTC    Info    WsusService.24    RollupEventReporter.BuildReportingServiceUrl    Found config says USS is MU site
2012-09-04 00:25:02.080 UTC    Info    WsusService.24    WebServiceCommunicationHelper.GetProxyConfiguration    Use Proxy: 10.251.33.80:8080
2012-09-04 00:25:02.220 UTC    Info    WsusService.24    MicrosoftUpdateRollup.ReportEvents    Rolling up 2 events.
2012-09-04 00:25:03.220 UTC    Info    WsusService.24    SusService.ValidateServerCertificate    CheckValidationResult Succeeds: CertOK
2012-09-04 00:25:03.627 UTC    Info    WsusService.24    RollupEventReader.SetLastRollupComplete    Finished Rollup.  Setting time anchor in local DB as 04/09/2012 00:24:52