Endpoint Protection

The client is a laptop with XP SP3 and both client and server are RU5.

Client won't update through SEPM, only LiveUpdate. 
There is a location based policy where the client should always update via SEPM when on the local LAN.
The SEPM can see the client and see the out of date definition status.  After liveupdate SEPM can see definitions are now updated on the client. so there is obvious communication between the client and SEPM. Green light is showing on client gui, but status shows as if it is at a remote location even though it is on the local LAN.
What causes this? 

In how may clients you are having this problem?
Once again double check the location conditions. Refer below article.
How to create Out Of Office Locations Rule