1. Windows versions compared
. Unlikely you should need a version higher than Home Premium.
2. Yes, but why would you want to? There is a good reason for using Starter in a 'Netbook. It's better suited to a low power 'Netbook than the higher versions. Linux is also a good option for a low power unit like a 'Netbook. But you could do a standard 'Windows Anytime Upgrade'.
3. Just like any other laptop without a DVD drive. You can boot up an alternate, non-virus infected OS on a USB thumb drive. And like any other PC or Laptop you create a bootable rescue disk (or thumb drive) after you've set it up.
4. If you can't access your files you can't back them up. Otherwise if your hard drive and it's file system is working you can recover files with a either a bootable OS (see #3) or remove the HDD and attach it to another computer.