I would say that a stock duramax at the least would be even with the titan. I don't know what they do in the quarter mile but all you have to do is get a mild chip and you're sure to beat him. Even the best chip out there for a titan gas engine is no match for even the mildest chips for diesel engines. You can run the stock intake and exhaust, but it just doesn't make sense. They're both pretty cheap upgrades and yield quite a substantial gain for the money. At least get a 4" mandrel bent turbo back. And it would only make sense to get the intake too. Look at it this way, you buy the chip but stick with the stock intake and exhaust. It's restrictive compared to the aftermarket offerings. You want that air to get in and out as fast as possible which will increase power and lower EGT's at the same time. If you free it up, you can run higher chip hp levels and get the same temps as with lower levels and stock in/ex.
As for lifting the truck you're going to suck quite a bit of power out of whatever you do add to your truck once you throw on those giant shoes. Not to say a truck on 37's can't be fast, in fact I saw a highly modified dodge run mid 13's on 37's......but that's highly modified. You'd be on mild side so if you smoked that titan to begin with, you might just barely squeeze it out with the bigger, heavier rotating mass. As for a lift kit, i've really started to like fabtech the past couple of years and if I did decide to lift my truck again I'd probably go with their kit.
Anyway, i'd go ahead and race your buddy just to see what he has.....then go spend a few bucks and go for a rematch, but don't tell him what you did. Let him stare at your tailgate for a few...