I understand your feeling on this. I have the same issue. I pre-ordered a Windows 7 but I don't want to reinstall all my applications. I just like what my computer is now!
I was bugged by not able to upgrade to KB974431 but finally I did the sfc.exe /scannow and it reset the version and I did the update. I don't know why you can't do it. There is another way what you can do, it will take time and some money but sometimes it is better than reinstall all applications especially something involves configs, passwords ... etc settings.
Use a clean drive or just buy a new one, connect it to the USB port. Boot Windows 7 with its DVD. Select move settings (migrate option), move all your existing hard drive settings to the USB drive. You will be surprise it actually will move many GB data to the USB drive, so that is why I said use a new drive. Then re-install Windows 7. Then just delete the windows.old that is where the old windows 7 files. Then do all the upgrades... reboots ... and you will see the KB974431 update without problem. Then activate it and migrate all the stuffs back. I did that once but I don't recall all the details but it worked. While I was using the beta Window 7 I didn't like one of the new beta and there was no way to go backwards so I did a migration then re-installed the old beta Windows 7 and migrate the data back. What your friend told you was valid. You have to stop the service, change the ownership and delete or modify the files. The trick or technique was developed for how to activate the newer Windows 7 beta version with the old RC version product id which provided by Microsoft. If you don't want to spend time to do the research then use the migration method, it takes time but you can install your legal version and migrate everything back and without any more worries in the future. Playing this cat and mouse game with Microsoft is just like the iPhone jailbreaking game with Apple is another example of tiresome nightmares. The difference is Microsoft is much tender and kinder than Apple. Apple is greedy and fascistic. For Microsoft, you just pay them and problems solved. For Apple, you don't even have that choice.