Windows

Yes you can, you can use normal Ethernet (wired or wireless) with TCP/IP and Direct connection using Infrared, Serial or Parallel connections.

see http://www.practicallynetworked.com/

Yes, it's possible, as long as you're only wanting to set them up in a WORKGROUP rather than a DOMAIN environment. XP HOME can't be connected to a domain.

You could also use 2 CAT5 patch cables and a workgroup hub to connect the 2 PCs as an additonal option. Most mini-hubs only cost $30 or so, and would give you the flexibility to expand you network in the future if you choose.

Good luck with this.