2011 E09 Restore Key: Win Update not working

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Wondering if anyone might know what might cause this.

(2012 E09 USB restore key doesn't work as per other posts)

Used 2011 E09 USB to restore a 2011 Win 7 image to a new hard drive in our E09 Classmate. 2011 Win activation script appeared to work. But Windows update reports it can not work as the Windows Update service is not running. But when I look in services, it is started and running (and I stopped it and restarted it too, rebooted etc etc) but still the same Win Update message. Reinstalled twice with the same outcome.

Any ideas ?
Is it true if in general Win 7 is not activated, Win Update is disabled ?

You might think the game this year is basketball related, but it is really successfully installing Win 7 on a Classmate.