Windows Vista doesn't allow one to use the install cd of a previous version of Windows to authenticate as it being an upgrade of a full version. Instead one has to install the old version of Windows first, and then boot into Windows to install Windows Vista. More Info MS KB930985.

The work-around is to use the upgrade-cd to install a non-activated version of Vista (faster), and then perform an inplace upgrade (cleaner):

1. Boot using the Vista Install DVD.
2. Click Install Now and do not enter a Product Key when prompted and uncheck Automatically activate Windows when I'm online.
3. Pick the proper product edition (Home Basic, Home Premium, Business, or Ultimate) when prompted and install Vista.
4. After the install has completed, then launch the Vista install again, but do it from within the newly installed Windows Vista.
5. Select to perform an Upgrade and now enter the Product Key when prompted.

Credits WindowsITPro.com