Not much detail to go on; it's clear that the attempt to use Software Update Server hasn't worked for you, but few details on the current configuration.
Same OS X 10.7.3 and OS X Server 10.7.3 versions on both boxes?
Are any other existing client hosts using this Software Update Server, or is this a new installation?
For troubleshooting, some of the usual details to check are DNS services (which might already work, depending on how you've configured the software update defaults setting and how you've tested the http connection to the web server, but improper DNS services configurations have caused all manner of weirdness).
Check the Software Update Server logs to see if the connection has been made, and then the general logs (via Console.app) on both ends of the connection.
You've probably already checked this, but also determine if there are updates cached and active on the Software Update Server.
Are there any web proxies or nanny filters or other gateway-based or DNS-based filtering tools in use within the network?
Verify the defaults setting in the client, as well. From experience, mistyping host names is easy enough.