This does sound to me to be a firewall issue. I got the same denial pop-up when I first tried to network.
I am running Nortons and there are a couple of places where you need to make changes to allow file transfer.
Firstly you need to set the IP range in the networking section and you have to allow (if not already) windows file transfer in the advanced section.
If you are running Nortons and still having probs PM me and I will take you through what could be the issue.