Risenzealot: Just figured I'd throw my two cents into this discussion. This is kind of annoying :(
One thing I haven't seen mentioned is not only can you not join your friends (or any other game on Nightmare/hell) you also see pretty much no one in chat regardless of channel. This is because Battle.net restricts games and chat by level apparently. Since the game thinks you are level 1 you will only see level 1 players listed as in the room. Also you can't join class specific channels as Battle.net doesn't recognize you as any class.
One curious thing to note. Battle.net DOES in effect know your class and level in some way. I created a game after killing Diablo for the first time just to check for spell books. I immediately hit escape and exited back to Battle.net. When I clicked "join game" sure enough my game was still listed there and it showed my class, level and the little red dot next to my name. So this tells me some part of Battle.net recognizes all of your info. Not sure why it doesn't work.
Yea I noticed that too.