Novation Launchkey Not working properly in Cubase 7


I purchased a Launchkey 61 recently. At the time I was using Cubase 5.5.3 and I was able to get it working perfectly under that version. More recently I purchased an upgrade to Cubase 7 and am using version 7.0.4 and my Launchkey does not work properly with Cubase 7.

Using the same settings as in Cubase 5 where it worked perfectly, it now has the following problem. When I play on the keyboard I can’t get it to trigger any sounds on my VST plugins. I can see the MIDI messages being sent in the Transport Panel, as well as see them in the MIDI track section. I can record MIDI from the Launchkey to a MIDI track and play it back to my VST plugins with no problems. But it will not make any sound at all when I play on the keyboard even when it is recording ok. I have the MIDI Thru enabled in preferences, and I can’t for the life of me think of what to do next :cry:.


My Launchkey 61 works just fine under Ableton and Propellerhead reason.
Strange thing is: I open Cubase, open new project, select Halion. I can play the VST virtually on screen (pads, keys, etc…). The weird thing is that my physical pads DO bring sounds (according some keys), but when I touch the keyboard, no sound is triggered. I think I have all my MIDIin- and outputs right. Anyone has some suggestions?
Win 8.1, Cubase 7.0.5, 8 Gb RAM, Realtek Auio Card onboard.