Sure it can be done, and without any special hardware except for a second video card (PCI unless you have the Asrock 939 Dual mobo which can support AGP and PCI Express video cards simultaneously - or you could replace the current vid card with a dual-head unit from Matrox et al.). One user can use PS/2 mse/kbd while the other uses USB. A setting can be changed in the registry to allow a larger number of simultaneous connections to Windows. I think the default limit is 4 or maybe 10, I forget.
And there was a company that made a video card with mouse and kbd ports just for this purpose. But I've forgotten the name.
Or the Jetway is a simple and inexpensive way to do it if you're starting from scratch.
And the Citrix software does multiuser Windows too.
And here is another unit
Rose similar to the Sewell - you'll just need to find a place to buy one.
And I found yet another from Aten "Masterview" for under $120. per froogle.
So the idea is pretty common with lots of players in the field.
.bh.