It is still a pain in the *&$ but you can do it….

When you first encounter this prompt for your product key, just hit next and proceed with setup.

Choose which version of Windows you have purchased, check the box and click Next.

Once the first install of Vista is completed and you start the second install from within Vista, you’ll need to enter your product key.

Choose “Custom (advanced)” to perform a clean install.

Once the second install of Vista has been completed, you can activtate your installation through Microsoft.

Microsoft internal documentation reveals workaround for Vista Upgrade DVDs with no need for a previous version of Windows

DailyTech reported on Monday that Microsoft no longer performs disc checks during an operating system install. In the past, when performing a clean install, a user could boot from an install CD and insert a disc from a previous version of Windows for upgrade compliance.

However, per Microsoft’s new licensing requirements for Vista, users are required to install a Windows Vista Upgrade from within Windows XP. When this occurs, the Windows XP license is forfeited and the Windows Vista installation process can take place.

DailyTech has confirmed a new workaround proposed by Paul Thurrott (via Microsoft internal documents).

This workaround allows users to perform a “clean install.” The process is a bit tedious, but is not hard at all to complete. Users have to perform these simple steps to perform a clean install of Vista without a previous version of Windows installed with an upgrade DVD:

1. Boot from the Windows Vista Upgrade DVD and start the setup program.
2. When prompted to enter your product key, DO NOT enter it. Click “Next” and proceed with setup. This will install Windows Vista as a 30-day trial.
3. When prompted, select the edition of Vista which you have purchased and continue with setup.
4. Once setup has been completed and you have been brought to the desktop for the first time, run the install program from within Windows Vista.
5. This time, type in your product key when prompted.
6. When asked whether to perform an Upgrade or Custom (advanced) install, choose Custom (advanced) to perform a clean install of Vista. Yes, this means that you will have to install Vista for a second time.
7. Once setup has completed for the second time, you should be able to activate Windows Vista normally. You can also delete the Windows.old directory which contains information from the first Vista install.

There’s no telling why Microsoft left this loophole wide open with Windows Vista Upgrade DVDs, but this means that any retail upgrade DVD can be used as a fully functioning full retail copy of Vista.

Thanks to dailytech.com for this info