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Can I just connect the 2 computers to the "server" with CAT5 cables and call it a day?
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No.
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I also may be able to use the family router, but i would not be able to connect it to the internet as the modem is accross the house(will it stil work as a network switch?)
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Yes.
However, you can buy a cheap switch for 20 bucks.
Plug them all into the switch with CAT5.