It's a problem with IE8.
See this post here: http://aaron-kelley.net/blog/2010/03/cant-activate-windows-xp-after-a-repair-install-or-in-place-upgrade/
It worked like a charm!!
1) On a separate computer, download IE8 from Microsoft: http://www.microsoft.com/windows/internet-explorer/worldwide-sites.aspx
2) Install it onto a flash drive.
3) Start problem computer in SAFE MODE (WITHOUT NETWORKING, WITHOUT CMD PROMPT)
4) Once Safe Mode loads, insert the flash drive and run the installation EXE for IE8. (Now is also a good time to install any network drivers for new Motherboard or NIC).
5) Restart, and log on as normal.
6) Click to activate now and everything should work!!