From what I gather, you have a hard disk with one big partition (C:) and are trying to install Server 2003 on it. You can't have two OS's installed on the one partition though so you'll need to make room for a new partition and create it for your Server 2003 installation.
The best way of getting this to work would be to use something like Norton Partition Magic to shrink the partition you currently have on the drive as the disk manager in XP can only create and delete partitions. You should shrink it by the amount that you want your new partition for Server 2003 to be (bear in mind that you have to have that much free space on the original partition before you can shrink it).
Then, boot up your Server 2003 disc and you should have an option to create a new partition in "unallocated space" which will be available as a second option under (or over) C: in the partition setup menu.
