While trying to troubleshoot our WSUS 3 Beta install today I found a long list of issues with the beta. I now know why our installation failed and the date it failed.
Issue 6: Remote SQL limitations and requirements
WSUS 3.0 offers support for running database software on a computer separate from the computer with the rest of the WSUS 3.0 application.
• You cannot use a server configured as a domain controller for either for either the front-end WSUS server or the back-end SQL server.
My WSUS server is a Domain Controller, WSUS server (our only one at the current time), and it's SQL server. It looks like I will be going back to WSUS 2 for the time being untill I can get this all figured out.
By the way this is a perfect example of why one should not use BETA software in a production environment.
Also it is important to note that the Embedded Edition of SQL Server is not uninstalled when you uninstall WSUS 3 Beta.