I'm going to start by strongly recommending simply buying an ISR instead of doing it the way you wish, it'll be so much less hassle, and better performance and convenience to boot (that and they're not too expensive). That said, what you want can be done.
You'll need an Ethernet crossover cable:
A crossover cable is the same as the standard cabling you're used to (probably cat5 UTP), but with one change. In a standard "Straight-through" cable, on the inside, there are 8 wires going from end to end. The same is true of a crossover cable, but instead wires are crossed in such a manner that the wires meant for sending traffic and receiving traffic synch up on each end. See the Wikipedia article for more info, if you care.
Note that the colours in this picture do actually match up to real life. Take a close look at the rj-45 connector on your Ethernet cable, if it is transparent, you will be able to see by the order of coloured wires what kind of cable it is!
Which you can purchase from pretty much any computer shop, or make yourself.
First off, make sure both computers are in the same workgroup.
Windows xp: Right click "My Computer" -> Properties, then click the "Computer name" tab. Click "Change" and name a workgroup. Reboot.
Win7: Use the start menu search to find the change workgroup name dialogue, and set it to the same as the XP box. Reboot.
Now hook the two machines together using the Ethernet crossover cable.
Next, share the internet connection:
On the Win 7 box, search in the start menu for "View network connections". Right click on the internet connection, and select "properties", followed by clicking the "sharing" tab. Check "Allow other network users to connect through this computer’s Internet connection" and click OK.
Now both machines should be able to share files and an internet connection. As for the wireless, I've never done it - I'm not actually sure that you can use a wireless NIC as an access point.