I set my update server to look to itself the same way I set up the clients. Things seem to work well this way.

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I do the same as kiltbear. It seems silly to point the machine acting as SUS to itself, but it works great. That setting doesn't influence where the SUS process goes for updates, only where the user-facing Software Update process looks.

I'd recommend using Software Update Enabler if you're just changing the settings on a small number of machines. It works smoothly with SL now, too.

http://www.allocinit.net/apps/suenabler/

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You can also point your server back to itself via the command line. No third party GUI necessary.
defaults write /Library/Preferences/com.apple.SoftwareUpdate CatalogURL http://my.server.com:8088/

Replace my.server.com with your servers hostname or IP. Don't forget the port number (normally 8088) and the trailing /.

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