WinXP NO LOOPBACK

While i was trying to connect two computer via peer to peer topology. Those 2 machines were Win98 and WinXP, I can ping Win98 from WinXP but pinging form Win98 to XwinXP is not successfull.

As troubleshooting is concerned, I tried the whole protocol suit of TCP/IP if this really is working. So I ping the localhost 127.0.0.1 and the result was a "Request time Out", which there is no link between those 2 machines. I did Checked the cat5 cable, checked the workgroup, checked cables and static address and still nothing.

Is it really true that there no possibilities that I could check the protocol, if is still works. Through ping 127.0.0.1.

Can somebody advise me on this hosts file In WindowsXP.