Mcadams

It works fine. You just need to use a bit of optical illusion. Cut out everything that wouldn't be seen from each angle on the paperdoll so that they don't overlap with your sprite. Like so:
 

 
 

For variables that are yes and no it's better to just use a True/False switch to keep things simple. Instead of HasBook = 1 or 0 you can just have it as HasBook = True or False. 
 
For the scenario you're doing, It'd be best to have it like:
Talking to the chief
  >Conditional Branch
       >HasBook = False
            >ConditionalBranch
               >ChiefGivenItems = False
                  >here are some items, etc
                       >Set ChiefGivenItems = True
               >ChiefGivenItems = True
                  >'you should go look for that book'
       >HasBook = True
          >Conditonal Branch
              >QuestComplete = False
                  >Conditional Branch
                      >QuestStarted = False
                            >give quest
                                >Set QuestStarted to True
                      >QuestStarted = True
                         >repeat quest instructions
              >QuestComplete = True
                   >good job, go do this now, etc
 
Bookshelf
    >Conditional Branch
        >QuestStarted = False
           >You don't find anything worth reading
        >QuestStarted = True
             >Conditional Branch
                  >HasBook = False
                     >You find a book on the shelf!
                         >Set HasBook to True
                  >HasBook = True
                     >You don't find anything worth reading
 
something like that

Your first problem can be solved by changing the render order for paperdolls in the server config, the second problem would require the source once it's out, but an easy way to do it would be whenever a player equips a helmet, it defaults them to a bald variant of their sprite, and then reverts when taking the helmet off

Short answer: Yes.
Long answer: Yeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeees.
 
I looked around to be sure and it doesn't look like you can change it now, it will certainly be possible when the source is released in 2049 the near future.

You can click the gear in your client to change the resolution of the client. It supports up to 1920x1080.
 
You can also (I believe) change the images in the GUI folder to edit the appearance of the GUI.

I looked around and there's no specific condition for sprite change, however you could do this easily by making a self-switch when the player changes their sprite, have it like "IsSpriteWhatever" and set it to true, so once they change into that sprite the game will recognize it, and when they change back set the switch to false.