So this can both mean "we are friends with him", and "he and I are friends" (in the sense that "we two are friends")?
Yes, though it should be "he and I are friends"
Такая прекрасная картина! Что ёжик ест? Лёд?
How about "I am friends with him" ? I don't know if it is grammatical, but it is very commonly used.
Sounds good to me.
so, how do we know Мы meant we and not I in this case?
Где-то раньше мне не засчитали предложение "we are friends with you". Судя по этому примеру оно было правильным.