I guess that I will submit this as a clarification request since I don't know if any of these ideas might work:
First, what is the current version of your OS -- Windows 98 or what?
Second, is the XP upgrade CD designed for the same locale as your currently installed OS version?
Third, did you try manually running the XP Upgrade Advisor utility first? To do so, note that Windows XP Setup automatically runs the Upgrade Advisor tool when
you upgrade from a previous Windows operating system to Windows XP. You can
also run the Upgrade Advisor tool manually by clicking Check System
Compatibility on the Welcome to Microsoft Windows XP page that appears
after you insert your Windows XP CD-ROM into your CD-ROM or DVD-ROM drive. Perhaps manually running the Upgrade Advisor Tool and uninstalling any programs which it says are incompatible with XP may then allow the upgrade to successfullly run.
Fourth, it appears that you uninstalled IE7 and now are using IE6. Thats fine, and this actually was a pretty good idea since the XP SP2 upgrade CD will be expecting to find IE6 installed on your computer.
Anyway, these are just some thoughts for possible things to check and to try.
Okay, did the XP upgrade run at all, or did the computer simply restart in order to try to run the XP upgrade CD?