Why are you trying to run Open Transport? Localtalk does not require any additional extensions besides Sharing Setup, Sharing, AppleTalk and possibly the INIT for an ethernet card if you aren't working over serial.

Should be as simple as opening the Sharing Setup panel, setting the machine name and password, flipping on File Sharing and refreshing the chooser window on the other system.

Edited: just noticed you are on 7.1. If I recall the control panel arrangement was different but you should at least have a Networking panel.