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Option (1) is what Visual Studio 2005 does when developing anything web related. To be honest I have never looked into this myself either, so it would be a matter of researching it.

Having said that, if the intention is to have many network connections being served from the Server machine, by definition Windows XP Home is a big no-no as this edition limits the number of concurrent UDP/TCP connections it can handle (purely a marketing limitation for people to upgrade to Professional I'm afraid).

AL