#1) Grab your shiny
new Windows Vista "Upgrade" DVD and "boot" your PC from it.
#2) Select "Install Now" button but DO NOT enter the Product Key from the yellow sticker on the Vista packaging that holds the DVD.
Also, make sure the "Automatically activate Windows when I'm online" box has NO tick in it!

Fig 1.1 - Windows Vista Product Key Screen
In the next dialog box that appears, confirm that you really do want
to install Vista without entering a Product Key.
#3) Now from the list
on the next screen you must select the version of Windows Vista that
you're installing: Home Basic, Home Premium, Business, or Ultimate.
#4) On the next screen select the "Custom" install, not the "Upgrade" install option.

Fig 1.2 - Select The Custom Option
#5) Windows Vista will now copy all the files it needs so sit
back and relax for a few minutes! Please note that the PC will
reboot automatically several times.

Fig 1.3 - Wait For Windows Vista To Install
At this stage of the installation DO NOT attempt to "activate" Windows Vista, that will come later. Now the installation is complete move onto the next step.
#6) We now need to install the the Vista upgrade files... To do this place the DVD in the drive again but DO NOT try to run the setup again from the DVD.
Instead logon to Windows
Vista using the account you just created and from My Computer run
the DVD's setup.exe program.
#7) On the screen that appears click "Install Now" but
make sure that you also select "Do NOT Get The Latest Updates For
Installation." - You will check for these updates lat a later
time...
#8) On the next screen you CAN now enter the Product Key from
the yellow sticker on the Vista DVD packaging. But make sure you
TURN OFF the option "Automatically activate Windows when I'm
online."
#9) Now on the next
screen that appears you will need to select "Upgrade" and not
"Custom" that you selected in an earlier stage...
#10) Wait while Windows Vista copies the files it needs and
reboots itself, there is no action required on your part...
You will be asked to boot from the DVD - DO NOT do this!
Instead, wait a few seconds and the setup process will continue on its way. You will notice some character mode menus appear, just IGNORE them!
After a few seconds, the
correct choice will run for you automatically...
#11) On the next screen to appear click the button labelled
"Start", Windows Vista's login screen will then appear (this may
take a few moments.)
Now just enter the username
and password that you selected during the first install and you are
finished upgrading to Windows Vista!
#12) All that remains is to activate Windows Vista within the
next 30 days. Failure to do this will mean you will lose most
functionality of Vista.
To activate Windows Vista simply click Show more details in the Welcome Center that automatically displays upon each boot-up, then click Activate Windows now.
If no Welcome Center appears, access by doing this: Start - Control Panel - System & Maintenance - System.