You have always been able to Bridge from AppleTalk-over-Ethernet to AppleTalk/LocalTalk (e.g., PhoneNet wiring) using one of the solutions below. They were introduced as Printer Bridges, but they can Bridge up to 8 devices including File Sharing Macs (but cannot get those Macs on the Internet):
1) Farallon EtherMac iPrint LT
2) Asante AsanteTalk
3) Apple Bridge software, running in the background on a Mac with both Ethernet and LocalTalk ports
All this stuff inter-operates pretty much as Gil has said until you get to 10.4. At 10.4, Apple eliminated support for File Sharing using Appletalk \[AppleTalk/LocalTalk was already dead in Mac OS X, but they eliminated AppleTalk-over-Ethernet as well.]
OS 9 supports File Sharing using both AppleTalk-over-Ethernet and TCP/IP \[TCP/IP is also over Ethernet, but cannot be converted to AppleTalk/LocalTalk]. OS 9 does this trick by including a bit of software called ShareWay IP. This package appear to have been written by, and is now available from a third party, Open Door Systems, at a modest price (US$39), and can be retrofit into OS 8 and some OS 7 systems:
http://www.opendoor.com/shareway/
PS: This illustrated article explains connecting OS 9 and Mac OS X:
http://homepage.mac.com/car1son/os9xnet_nfilesharing.html
In general, you will have better luck attempting to connect from the Older Mac to the Newer Mac.
Message was edited by: Grant Bennet-Alder