This is most certainly possible, but you need to take in account the following:
1. If you are connecting the Xbox/PSP/whatever to the PC directly (without a switch or a hub in between) you must use a special type of cable -- ethernet crossover cable. They are not hard to find, most computer stores will have some and it will clearly say "crossover" on the package.
2. For "Wi-Fi" wireless connections to an access point / router somewhere else in the house or nearby, you do not want to use Internet Connection Sharing. Simply bridge the wireless and wired adapters, as described
here. If you have previously enabled ICS you will need to disable it.
