It sounds like your trying to install it from within windows xp. It is probably thinking you want to upgrade...but its an older OS than xp, thus why you're getting that error. I personally have never tried to install a 2nd OS through a windows environment so i wouldnt know how to guide you through that or if its even possible.
The 2 options i see available are:
A) You could probably buy an external cd/dvd drive (plugs into a usb slot) as seen
here, burn it to a cd, restart, access the boot menu and boot to the usb device.
B) Toss it onto a thumbdrive and do the same process as described above.
Have you looked into running it through a virtual machine such as virtualbox or vmware? I'm not sure if it can be done or not with win2k. Only issue with that is that you may not be able to utilize the features you are interested in. Its worth a look though.
Just some thoughts but i hope that helps.