[MunchkinMan]

1. When it comes to Hand Items, you add up the number of Hands used and subtract that from the number of Hands you have (2). So, in the case of the Two-Handed Sword, which says it has -1 Hand means that you go from 2 - (-1), or 3 Hands, allowing you to use the Three-Handed Sword, as long as you're not using some other Hand Item. I imagine that such a character would look epic.
2. Since the Magnificent Hat protects against Curses, the player using it shouldn't have to lose a level. Otherwise, you handled it correctly.
3. No. In fact, the Tongue Demon's pre-combat effect (and any Monster that offers the same kind of effect) doesn't kick off if it is added to the combat after it has started. In other words, that effect only affects the player who kicked down the door to get Tongue Demon, or played Tongue Demon to look for trouble.
4. It only affects the Monster, Monster Enhancers, and one-shot Items used in the combat.