the simple solution is always best
Windows XP Home is built on the NT kernel. This means that instead of having "services" located all over the OS configuration files, they are all in one neat and tidy place in the registry. So, adding onto what No0dle suggested, all you do is load up mmc, add the services snap-in and disable the following:
1. Workstation
2. DHCP Client
3. DNS Client
You have to be admin to enable/disable these services, so make sure your 'friend' is using a normal 'user' account, and he will be effectively cut off from the net. Unfortunately, XP Home does not have group policy, so you can't lock down the workstation through GUI tools and because it is a standalone workstation, the policy would apply to all users anyway, which would elsucko. Admin w/o a desktop :).