I ran into the same exact problem the other day at a client's office. After the user logs in, the mapped drive in My Computer has a red X, but when you double-click the drive, it connects.

I noticed that when I ran net use f: \\blah\blah that it would connect to the mapped drive, but the WinXP "Unable to connect..." balloon would still appear. So to automate the connection of the mapped drive and to get rid of the balloon message, I did the following:

Created a .bat file to connect to the map drive:
net use drive letter: \\server\sharename

Created the following registry entry to suppress the balloon:
HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Contro l\NetworkProvider\RestoreConnection = 0 (REG_DWORD)

The following KB article from Microsoft explains why XP-Home may not remember a mapped network drive connection...read the bottom of the article.
MSKB Article

By the way, you're not the only one with this problem. I scoured Google and there are many people with this issue. It seems to mostly effect the WinXP Home users.

Good luck!!