Is it possible to play a game with someone else in my house over the wireless internet (in 2 different locations obviously)? I've tried setting up a home network but failed miserably.

The only other option is playing online against each other. We can both log on and join other games, but when we try to host one or join one that the other is hosting, the countdown timer keeps going. is this because we have the same IP address?

Ports must be forwarded in order to host a game

http://worms2d.info/Hosting_Guide

is this because we have the same IP address?

Yes, that's the problem. The ports can only be forwarded to one IP address (or so I was told), so the only way to play online with 2 computers in the same network (and one of them hosting the game) is by using WormNAT2 (http://worms2d.info/WormNAT2).

I had this exact same problem just a little while ago.

Ports can only be forwarded to a single internal IP. As long as you only intend to host from the computer that has had ports forwarded to it, you should have no problems when setting up your network in the regular fashion.

If you configure one copy of the game to use a different port for hosting, you can set up port forwarding (and hosting) on both computers. However, that probably won't allow you to join a WormNET game hosted on one computer from the other, because of how most routers work.

In such situations, your choices are:
1) Use a hosting service such as WormNAT2 or HostingBuddy
2) Get the WormNET wa:// URL using e.g. WebSnooper, change the IP address from the external IP to the internal (LAN) IP, and pass that URL to WA.exe.