Wow. Your "NTVDM" error is something in and of itself, not related to your networking, but could possibly be an issue. Search this forum for that error, it's been discussed before, and search google.
The IPs are all right.
Go on each PC and try to Ping the other. That is, also try using the other PC to ping this one with the error.
If you go Into My Network Places on the XP machine, and click, I think, entire network. Does it ever find the other one in the workgroup?
Look through your firewall's "blocked" list and post here if anything has a block on it. And make sure the Windows firewall is off (xp), since you are using another one.
Don't worry, we'll get to the bottom of this. But try to fix that NTVDM error first.