1. You die, you die. But then, you get to make another character. Luckily, PC death is fairly rare (I think it's happened twice, and both with warnings). Of course, there's nothing stopping your allies from raising you...
2. Yes, you can, but they have to be from the SRD (so, no illithids), and you have to make sure you don't go over the starting level. So, really, it's ECL +0 races only... but we have plenty of kobolds, and I know there's been an orc or two. And gobbos should be okay, as well.