All you need to do is edit the hosts file that is in system32\drivers\etc of your windows installation and add the following line to it(in red>>): 127.0.0.1 mpa.one.microsoft.com
This redirects all request to mpa.one.microsoft.com back to your computer. This is the address that used to perform the WGA check.
Check your Documents And Settings/All Users/Application Data folder and delete the folder Windows Genuine Advantage if it exists. Once this is done start the installation of the Internet Explorer 7 and click on Verify during the installation. The connection to the Microsoft server will be redirected to your computer and the installation continues unhindered.
The same trick works for the installation of the Windows Media Player 11 too.