grub does not install a MBR other than his own. Big distros have scripts to detect a windows bootable partition and boot it.
So my question is, how did you make space for linux and how was windows installed (OEM or clean).
Next question is what kind of partitions are there? There are 2 ways of booting and 2 way of partitioning. Linux can use any of the 4 combination while windows only 2. Booting from a CD can be different that booting from the HDD in this case (and could be the reason why windows install CD gives that error). As forther information, when you manually choose a boot device, do you have a "Windows Boot Manager" option besides CD/HDD? If yes, then it's a sign of EFI.
In summary, the questions are:
1.how did you repartition and make space for linux?
2.do you have the "Windows Boot Manager" option in BIOS boot menus?
3.do you have GPT partitions?