Problem: On Windows Vista or Windows 7, or Server 2008 (XP activation could very well have the same bug) After I try and activate Windows, I receive the error code “8007232b” and the error message “DNS name does not exist.”
(Variations on message might also include: “Key management services (KMS) host could not be located in domain name system (DNS), please have your system administrator verify that a KMS is published correctly in DNS. “)

Cause: According to Microsoft, users who downloaded these operating systems from the MSDN/Technet are using the product under volume licensing, which requires KMS on your domain — a domain you likely do not have in the first place, with a service you probably wouldn’t be running in a home installation — though this issue could easily affect the commercial world as well.
Microsoft words it like this: “If you use MSDN, TechNet, or MAPs, you probably have volume-licensed media and were supplied a Multiple Activation Key (MAK).”

Solution: Open Command Prompt as an administrator
(Press Start, type CMD, right-click CMD and click “Run as Administrator” — a UAC prompt may ask you to verify this action.)

Type the command:
slmgr -ipk product-key-here
(where “product-key-here”, type the product key you received from the MSDN/Technet WITH dashes.)
Example: slmgr -ipk FGX5-AFDA8-85ASD-5ADF5-FDA5
(That product key is fake)

Press ENTER after typing the command, and wait for a box to prompt that the action has completed (takes 10-15 seconds in most cases).

Run the activation wizard again (Right click “Computer” from the start menu, click “Properties”, and scroll down to the bottom of the properties window to “Windows Activation”

Sources:
Direct from Microsoft (contains two other solutions you can try if this fails)
http://support.microsoft.com/kb/929826

Technet Forums:
http://social.technet.microsoft.com/Forums/en/winservergen/thread/3d1e007e-a5b0-453a-b92c-17696b93dfc2

If you use MSDN, TechNet, or MAPs, you probably have volume-licensed media and were supplied a Multiple Activation Key (MAK).

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Visit it here: http://maketecheasier.com/boot-and-install-windows-7-from-usb-flash-drive/2009/01/23