1. Passwords MUST remain in /etc. Yes programs can make ~/.* files on the stick

2. Well, you certanly can transfer /etc to anyplace you want, but it has to be in the root directory in order for your system to work.

3. I could be wrong, but I would say no. The best thing do is rip all your cd's to mp3's and carry them on that handy usb stick you were talking about earlier(if you have enough space).

4. Haven't tried