a) .NET 2.0 is largely compatible with 1.1, but there are some breaking changes. However, IIRC these are few. So no, 1.1 doesn't have to be installed, but remember that the framework is designed for side-by-side installation, and so leaving it installed won't hurt. Plus it'll allow you to run programs that explicitly require 1.1 (and not any other version).

b) Yes you can use 1.1 libraries, and you do not need 1.1 installed. Only one version of the CLR can be loaded at a time, so if you have a 2.0 program using 1.1 libraries, (ideally) the 2.0 CLR will be loaded, and the 1.1 libraries executed under the 2.0 CLR. I say ideally because you can specify the required CLR version in the program manifest.

c) I don't know, but seeing how often-used windows.h is, I'm sure it's fixed with final version.

if you find that you absolutely need the original functionallity of those broken changes from 1.1 in 2.0, you can download an extension to the normal API to cover those changes. It's better just to work around it, though.