In order to play with him? SO if one person wanted to be a Orc and the other wanted to be a nord they can't play with each-other?

Races are locked in to factions, so yes you will have to pick races that are allied.

You could still play together. It would involve stabbing each other, but, hey, you're still playing together.

DIng Ding Ding.... we have a winner. It is faction locked, but friends in other factions can be in your guild which allows you to talk to them while you play assuming you dont have Xbox party chat or PC ventrillo/ xfire

Pretty much, yeah. Maybe not, though? Most likely, yes, however.

What I mean by that is as of right now as far as we know yes, but maybe not.

And what I mean by THAT is there might be some sort of grouping system if there's some sort of cross-faction guild system (which there is). This is my opinion only and we have heard nothing about this.