Just a Crossed ethernet cable will do it, make sure its not a Straight one.
PC to PC use crossed, PC to router or modem use Straight.
If one or more pc is on XP then no external software is needed.
Just plug the cable in and run the network connection wizard.
The way youre doing it you need to select the option for this pc connects directly to the net and other pcs connect through this one, then select file and printer sharing on. This is running the wizard on the pc that has the modem first.
When it finsihes you can either let it make a floppy for you , only necessary if the other pc on the network doesnt run XP, or just select finish.
Go to pc no 2 and use the floppy if its non XP or if its XP run the wizard and this time select this computer connects to the net through another pc and then select File and Printer sharing and finish when it ends the process.
You probably need to reboot each pc after running the wizard to finalise the setup and you may have to configure your firewall on each pc to allow the network to work properly but basically thats all there is to it