Right click My Computer and select property. In the tab Computer Name, set Workgroup to match each other and give each unique name to identify system... Next, go to Network Connections. You should have a LAN entry if you have a ethernet card with drivers installed. Here, right-click, select property... In the list of installed items, select TCP/IP and select property... Enter similar IP addresses for you and your friend (192.168.0.1 and 192.168.0.2)... Note that IP address should preferably have the above starting 3 numbers 192.168.0.x... There are a few others also allowed for LAN... Rest are for internet...
Now, you should be able to see the other computer in Network Neighbourhood->View Workgroup Computers...
Arun