This error is typically due to a conflict in the system files when the DirectX installation cannot find a corresponding system file to continue the installation. You can, however, manually replace a file that should allow you to install DirectX.
Insert the game disk into the drive.
Click the Start button (Windows button for Windows Vista) on the Windows Taskbar.
Select My Computer (Computer for Windows Vista).
Right-click the game disk icon and select Explore.
Double-click the DirectX folder.
Right-click the 'dsetup.dll' file and select Copy.
Close the window.
Click the Start button (Windows button for Windows Vista) on the Windows Taskbar.
Select My Computer (Computer for Windows Vista).
Double-click the Local Disk C: drive.
Double-click the WINDOWS folder.
Double-click the SYSTEM32 folder.
Right-click on an empty space in the folder and select Paste.
Close all open windows.
Now run the installation again.
If the issue persists, you should reinstall DirectX directly from Microsoft's web site.