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2) The game tracks the in-game location of every single player who is playing. This information is then filtered down to your XBL friends, who appear as glowing orbs (Molyneux hinted at the potential for filtering by geographical location and other conditions, but this is not implemented). You can talk to them as you pass by, and they can enter your game and mess around as much as they like, regardless of where they are in the story.
3) Your dog cannot travel with you into another player’s game because it would be too processor intensive. Instead, your "world" goes into stasis when you leave, and your dog is there when you get back.
