Firstly, you can't run install windows while windows is running. You'll need to boot to dos. A startup disk is recommended as it has CD drivers.
Using a full version CD will result in an error message telling you that you need the upgrade version. The work around this is at the dos prompt type 'ren C:\windows\win.com win.old'. There is a space between win.com and win.old. This will make windows unbootable but you will no longer receive that message.
While installing windows, you will be asked which directory to install it into. It will recommend 'windows000' change that to windows.