I plan on starting this game up with a friend and I need to know if having all the expansions installed is mandatory for playing. Thanks

Nope. You can have 1, 2, or all 3 of them.

You don't need to buy all 3 chapters at once. You can either try chapter 1: Prophecies (I'm sure because of its age it's retail price is cheap) or go Chapter 3: Nightfall (newest, but has Heroes to offer).

If you and your friend are both new to the game, and most likely will be playing together, I would suggest to start with Prophecies for:

1) relatively cheaper to buy now
2) gentle learning curve
3) tons of skills given for free as quest rewards -- other chapters only give a handful and then you're stuck buying them.

Give Prophecies a try for a few weeks. Then if you like it, you can buy either Nightfall or Factions to expand your enjoyment of the game.

PM me your IGN and I'll see if I can help you out whenever you're in-game.