Microsoft has made some changes to activation of Windows Server 2008, Windows Vista and Windows 7 as quoted below.
Recent Changes to Volume Activation
With Volume Licensing for products such as Windows 7, Windows Server 2008 and Windows Vista, you must use a new type of product activation called Volume Activation (VA). To activate these operating systems with VA, you can use either a Multiple Activation Key (MAK) or Key Management Service (KMS), requiring a KMS key.
This means trouble for us offcourse 
When trying to activate a Windows Server 2008, Windows Vista or Windows 7(unconfirmed), I get this error:
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.
0X8007232B.
I have also gotten this same error where it reported the same error code but the error message was:
DNS name does not exist.
This error, for me at least, has nothing to do with KMS.
It is stated on Microsoft.com to be an error related to trying to activate a Multiple Activation Key(MAK) while not having access to a Key Management Service (KMS).
If you have your volume license key (MAK) all you have to do is go to “Control Panel” -> “System” -> “Change Product key”,
and insert the key. Even if you did it during installation!
That’s all it took for me at least.
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Thank you. Worked perfectly.
entering the product key worked for me as well. thanks for the heads up
Thank you for this easy and effective solution. I applied it and it worked.
Microsoft’s solution found in this article, but I prefer yours.
http://support.microsoft.com/kb/929826/
I can confirm that this exact problem occurs in Windows 7 Enterprise, and this solution works with Win7 as well.
I installed Win7 Enterprise with the KMS key. I don’t have a KMS server. I changed the product key as described to the same key that was entered during installation. This successfully activated the product.
Worked like a charm! Thanks for the USEFUL Info!!!
Yep. Thank you so much.