That's strange. Because it obviously installed the Background correctly but somehow messed up the .dds Files. Did you point the installer to your main LFS Folder? (eg. C:\Games\Live fo Speed?)
Try to install it again, if it doesen't work use a fresh installation of Live for Speed.
Yes you can install the LHD Version now and ovewrite it with the RHD Version once it's released.
Ecactly. They are for the Demo and Full S2 Verion.
No, i recommend you to backup your DDS and Pic Folder before installing. If you forgot to backup you can download the default Folders from the LFSDatabase too.