Product activation of Windows XP is only required for off-the-shelf retail copies. Activation must be done by telephone or via the internet within 30 days of installation, otherwise it will cease to work until it is activated. If you have bought your copy from Computing Service Sales then activation is not required.
If you have difficulty in activating Windows XP via the Internet, then try entering /proxyconfig.pac WIHOUT a port number at the 'Proxy Server' prompt.
N.B. Windows XP arrives with IE6 but even if you've already set this address in the normal way for the cache, it doesn't seem to take any notice.