AHA! Since I installed Win7 (inplace upgrade), I was unable to avtivate via the internet or do windows updates.
I tried all manner of things to get it going, including logging a ticket with microsoft all leading me down a garden path of disappointment.
Then it dawned on me (Now a week or two later) to run the update and from the command prompt see where my machine was connecting to.
TADA! I found that a previous Proxy setting I installed from proxycfg was still there and even though IE didnt have the proxy settings, the netsh(Windows secure network thingy) did. It was this hidden proxy config that was causing my issues.
to see if you have something similar go the command prompt as Administrator:
Click - Start [in the search for programs] - type cmd, then right-click CMD.exe that shows up as a result above, Choose run as Administrator and say YES.
now at the command prompt see if you have a proxy config:
netsh winhttp dump
I did, so I changed it like so:
netsh winhttp reset proxy
Problem solved.