Windows XP SP1 with invalid key, upgrade to Windows XP SP3 with valid key

Microsoft will de-authorize a key if it is used too often. They are doing this with many key types and I know they announced MSDN and TechNet keys would be under more scrutiny. This may be teh case here and the key has been tried too often.

If the Key is for the wrong type of media, the error would be different.

As suggested, a call to Microsoft would address this. I have had a similar issue and a 10 minute call solved the issue.

If they feel the key is used for piracy, you are likely out of luck.

Do you have an XP COA on your computer?

As noted by @ Darth Android this looks like an OEM install disk and it is odd that IT would have OEM keys to randomly hand out.

BTW, how do you know the key is valid?

I have been using Nirsoft's ProduKey. It works with Windows 8.

ProduKey is a small utility that displays the ProductID and the CD-Key of Microsoft Office (Microsoft Office 2003, Microsoft Office 2007), Windows (Including Windows 7 and Windows Vista), Exchange Server, and SQL Server installed on your computer.