From the message that you received, I would have to guess that the license for that copy of XP which you tried to install...is reflected as either installed on another system or pirated.
To me, the easy way to resolve it is to do the telephonic activation thing. I've done it before, it takes a minimum amount of time, and the personnel have always been cooperative and friendly to me.
If that system did not come with XP Pro (but came with XP Home), the fact that it's a Compaq and you are trying to use the Compaq license for activation...may be the problem. I don't know, but it seems to me that attempting telephonic activation will get you better advise than I can render based on what you have stated.
There are situations where XP licenses are deemed fraudulent...and that conclusion is erroneous, see http://www.google.com/search?hl=en&q=Y...G=Google+Search