I'm not sure but I think you problem may be with the Internet Connection Sharing (ICS). I'm certain you don't need to use that with broadband.
Just link the computers together and run the network wizard in XP. Ignore the proxy server and ignore ICS.
I have got one PC on Win98 and one PC on XP and I just connected them together, ran the wizard and everything worked.
I am sure there are a few network wizards out there who will go into more depth but at least you will be back to the top of the list.