1) Can the update be uploaded as a package and then unpacked/unzipped so that all the folders and files are set in their proper place and order? This would be a plus for those of us who have dialup or slow upload speeds. If so... HOW?
Answer: Currently I do not think a tar file is offered.
2) Does updating to a new version overwrite existing files?
Answer: If the zipfile contains a file with the same name as your server, and you upload it to the same dir, then of course it will overwrite it. Thing to remember, a server is much like your PC, so most rules of file storage etc, apply.
3) Will existing hacks which have additional, non-default files cause problems with an upgrade?
Answer: With the above in mind, of course they will need to be re-added, IF they are compatible with the new version. Check with the author(s) first.
4) Is it best to save the existing installation for reference? If so, HOW?
Answer: Yes, learn how to make backups via ftp. Not trying to give you a short answer, but daily FTP proceedures should be the first thing you learn when making a site <img src="https://www.ubbcentral.com/boards/images/graemlins/wink.gif" alt="" /> If you are unsure, see your webhosts FAQ's to see how they do things.