To summarize everything from SoE on this from theie message boards:
1. Only valid race and class combinations will work. For example, if you are a Barbarian Shaman, then the races that you will have available are Ogre, Vah Shir, Iksar, Troll, or Frog.
1a. Religion is similar that it has to be a valid option for the new race class combination. For example, a Tunare, High Elf cleric that changes to a dark elf cleric has to select Innurook (as it is the only option for DE clerics).
2. If you go from a race with an ability to a new race without that ability, you will lose the ability. For example, if you are a gnome with maxed out tinkering and you change to a wood elf, you will lose all of that tinkering ability. One of the devs said that your tinkering skill is set to zero in this example.
2a. If you then revert back to a gnome, there has not been any mention of your tinkering skill returning to the pre-cahnge value.
2b. The same thing applies to racial tradeskills (smithing), spells, breath weapons, etc.
3. Any racial armor that you are wearing will not be valid once you change. You will have to replace that armor.
4. All of the faction levels will be modified based on your new race and religion modifiers. You old race/religion modifiers will be removed from the equation and the new modifiers will be inserted and the new faction levels will be calculated. I don't think an "ally" level can swing all the way to "ready to attack", but I bet some "indifferent" could swing that way.