does the laptop, and the desktop computer have the same workgroup name?, also, if the desktop has the internet connection, let the desktop boot up first, then boot the laptop, the reason is, the desktop wouldhave to issue a lan ip address to the laptop, also, have you setup an account on the desktop machine so that you can log on to the network?

I'll explain my setup, but replacing the actual workgroup names with fictional names.

my desktop has a workgroup name of pc1, the other 2 pc's have the same name (case sensitive), the desktop has accounts setup for each user on the network, so that when a user (named john) logs onto one of the other pc's he has to enter the password that was setup on the account named john on the xp machine, following me so far?

then to share an internet connection, run the 'network setup wizard' on the xp machine, create a 'network wizard floppy' then run the same program on the laptop, the network wizard on the xp machine will configure the network for internet connection sharing and also setup the internet connection sharing firewall.

I hope this has helped, I used the same procedures on my home network, and it all works fine.