Working with a friend on a game

is it possible if we live at different houses? Is there anyway we can update the code and put it somewhere where we can both download it or can we compile our save files of the game?

Art will be easily transferable. For the code you can try uploading your behaviors to stencylforge so your friend can download them.

One possibility is to store your entire game folder in a version control system such as Subversion or Git.  You can find your game folder from the Welcome Center by clicking the "View Games Folder" button.  You can use a free public repository on GitHub (git) or Google Code (Subversion) and share everything between your two computers.  Once configured, just "commit" your changes and your friend can "update" his computer (and vice versa).  Private repositories can also be setup locally on your own computer or for very small fees at a hosting provider.

Another option, with less configuration, is to buy a low cost web host account and use FTP to store files in a central location that both of you can share and update.  You just upload your game folder after making changes and your friend can download.  Just be sure to talk to each other before uploading and downloading to avoid overwriting each others changes.