This is a very dear subject to me. My little brother (who is now 13) has autism and he has been a tremendous force in my life, and has made me so much more aware of things.
I would say that at this point, the friend is probably starting to realize that there's something "different" about him and is becoming more aware of it. Not treating him like something is "wrong" with him while he's over will mean a lot to him. I had never realized before how frustrating it is for the child to really want to be just like the other kids, and not understanding why they're different.
As far as explaining it to your daughter, keep it fairly simple at this age, if you feel like you need to explain it at all. We just told my son (who is 5) that everybody's brain works differently and we all have our own ways of seeing things and doing things. "Play time is fun, but when (Benny)goes home, it's time to settle back down a little and be (Ollie) again." At least, that's what works with my son.
I've seen my brother picked on a lot and bullied. I just really would like to beg that it not be overly explained as it being something "wrong" with him. Yes, he functions WAY differently. But, he knows it instantly when he's being treated differently because of it, and I've seen so many tears from my little brother that could have been spared.
That's my (very lengthy) two cents. Good luck!