I tried to call the MSDN support line, thier solution was to install the software from the MSDN CD that has been sent to the subscribers rather than downloading it from the MSDN subscribers online. It seems microsoft has uploaded an incorrect .iso image of OneNote 2007 and they are in the process of fixing it. Since we are using a volume user license and not everyone gets a copy of MSDN cd's I need to run around trying to hunt down the person having the OneNote 2007 Cd !!
If any one knows a solution for this problem, please leave a note :)
Update : This is a known Microsoft issue and you can activate your OneNote 2007 software by using the key you request for "Office 2007 Applications". Good for me now I don't have to run around to hunt the person having that CD ;)