1) Appears to be a bad video driver. MS has a support page for XP startup hanging at agp.sys. Basically, it says disable installed video drivers and use the default VGA drivers. Problems when Windows XP tries to load the Agp440.sys service
Try changing out the driver, look up your motherboard's website.
2) Regarding that "upgrade" option, I've seen it mentioned on a couple of sites (Pop in the XP cd and choose Install->Upgrade) but frankly I dont remember seeing this option myself. But what it would have done would be to install XP on top of itself, similar to an in-place upgrade. Are you using an ancient version of XP? Best to install the SP3 and the post-SP3 hotfixes.