After many tries of messing with everything I found this solution.
after it is configured with the software and phone # assigned do the following after you unplug the USB adapter power to the MJ.
The magic jack should be attached to the router and the phone line BUT NOT PLUGGED IN to the USB power.
Turn on simple config on your router and set it to "push button" configuration.
Find the switch on the router that "discovers" new devices (the push button). Press this switch on the router and the light should start flashing. It is now looking for new devices. At this point you have 2 minutes for the router to discover the MJ.
Now, plug the MJ into the USB power adapter. Wait until you see the MJ device appear on the router.
You should get a dial tone and be able to make calls.
There is one more step left. The Magic Jack device must be configured on the router with a STATIC IP ADDRESS. If you don't do this step and restart devices or add new ones and don't do this step after a while the error will come back.
PS I am running win 7.