When you first enter the game you will be asked two questions. The first is which race you would like to be. The second is which class you would like to be. Race refers to your physical appearance and characteristics. Some races are better suited to certain classes than others.
Elves are lithe and intelligent and excel in spellcraft.
Dwarves are tough and strong and are skilled in physical combat. Gnomes are quite agile and much heartier than elves, and do almost equally well as spellcasters or rogues. Humans are the 'normal' average that all other races are compared to and are equally suited for any class. Goblins are cunning and agile creatures who are shunned by most other races. They make very skillful rogues.