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newbie/network problem



hi,
i'm using both linux and win98, my 98 is connected to the internet so..i
build a little network (peer to peer) and i gave linux-10.0.0.10 and
win98-10.0.0.20 ip adress and on my linux machine i used the default
gateway to be the ip adress for my 98 by pinging the stations i get a
result but my linux machine can't "get out" the network why?
my subnet is 255.255.0.0
my default gateway device is eth0 wich is my network adapter.

i have two interface lo and eth0 both of them are in active, what does
'lo' means? why do i need it?