Further to last post, in the help file within Report Manager, the following indicates that you're seeing expected behaviour (if using integrated). Basically this means you can only have a single 'hop' (passing of credentials) and this is used when the user authenticates against the RS server (on the XP box). If you were using 2003 there is a setting that could help (lets credentials flow) but if this isn't possible, you'll either need kerberos (ergh) or simply change your method of connecting (use SQLauthentication, use a single UID/PWD etc etc).
Windows NT Integrated Security
Use the Windows credentials of the current user to access the data source. Choose this option when the credentials that are used to access a data source are the same as those used to logon to the network domain.
This option works best when Kerberos is enabled for your domain, or when the data source is on the same computer as the report server. If Kerberos is not enabled, Windows credentials can be passed to one other computer. If additional computer connections are required, you will get an error instead of the data you expect.
Do not use this option to run unattended reports or reports that are available for subscription. The report server initiates the running of unattended reports. The credentials of the report server that are used to access the report server database cannot be used to access external data sources.