I haven't checked wireless router prices lately. I got my Netgear router at Costco. It came with a PCI 10/100 network interface card (NIC) and I think I paid about $79 for the combo. I imagine prices have dropped some since then. I see some in the Tiger Direct catalog for as little as $30 and NIC's as low as $8.99.
However, I think you might have missed my point about making the desktop wireless too. If you used a PCI wireless adapter card in the desktop, you could get by without any wireless router. Your laptop and desktop would communicate with each other directly without going through a router. If you have internet access already set up on your desktop system, you can configure it as an internet gateway to allow the notebook to also use your desktop internet connection. You could buy a PCI wireless adapter for as little as $30 and not have to buy a router at all.
On the other hand, if you think you may need to add more systems to your home network in the future, or even just a network printer, then a router may be a better choice. Most home routers come with at least 4 downlink ports and 1 uplink port that connects to your cable or DSL modem, so this option gives you better expansion capabilities. The wireless portion of the router will usually support 255 wireless connections too.
If you're just going to use the laptop around the house, then you probably don't need the carrying case. If you're going to haul it to work or school, then a carrying case is a must.
If all you want to be able to do is share data files between the desktop and laptop, then there's no need to install XP on the desktop. The NIC card should come with Win98 drivers and they're fairly easy to install and configure.
The only problem I had when I added the XP system to my network was that neither the Win98 nor the XP system seemed to be able to see the shared folders on the other system. It turned out that even though I had created shared folders on the Win98 system, the two systems didn't recognize each other until I created a shared folder on the XP system. As soon as I did that, everything worked great.
If you did choose to install XP on the desktop, it should not be a problem even with only a 12 GB drive. My XP desktop has a 37.2 GB drive, but only 3.8 GB is used by XP Pro, Office XP Pro, and all my other applications and data. I use a separate 250GB External USB hard drive when I need to store any large download files, so my C drive stays pretty clean.
The only other problem I ran into in setting up my home network was that my internet firewall, Zone Alarm Pro, had to be told what computers were on the local network by entering their IP addresses into the trusted systems area before it would allow them to communicate with each other.
One final suggestion: CNET's (help.com) has a wireless networking course that might help you understand all your options and the terminology better. One class just ended, but they repeat them fairly often. Check it out!