I can't help with the XP installation problems that you have.

However  Setting up the LAN should be easy XP does most of the work for you.

1. Install any necessary hard/software ......ergo  network cards etc.

2. Run the Network set up wizard on both computers. This is found in your control panel. Make sure that you give the computers the same WORKGROUP name and different individual names. Tick the relevant boxes for how they connect to the internet  basically thats about it.

3. If you want to share files and printers then make sure that the file and printer sharing box is ticked in the properties for each connection.

That should be it ......... the only problem you might have is  with firewalls on each comp ...... I would disable them especially the XP firewall.

If you're still using dialup then I would look for  a freeware NAT firewall ....... this protects both computers  and doesn't effect the network as its more or less the same as the hardware firewall contained in Routers.