whenever you have a LAN card (or NIC, whatever you want to call it), there needs to be a way to send and recieve data. Cat5 cable has two wires (actually more, but they aren't really important for this discussion), one for sending and one for recieving. Normally, the don't cross over, ie the 'red' wire is one pin 1 and green is on pin 7 on one end, and they are on the same pins on the other end. If you are doing peer to peer, no hub then the send and recieve wires must swap, red on pin 1, green on pin 7 on one end and red on 7, greenon 1 on the other. Confused yet? To continue, this is necessary because you can't recieve data on the pin you are trying to send through. You will just confuse the card. So it's like driving the wrong way on a one way street. The cross over cable connects the xmit on one card to the recieve on the other and vise-versa. I think that should explain it. If not let me know.
edit: just a quick note about hubs. they automatically do this cross over internally, thus the need for a cross over cable is eliminated.