Hmm...well I always find the WinXP compatability wizard notoriously..erm..rubbish.
I would suggest copying the CD to your hard drive and seeing if you can run the setup programme from there.
If it installs but you still can't run the game, then the other possible solution if you have the bandwidth is to use BGTutu or similar to run it in the BG2 engine. This works fine for me under WinXP...
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