Yea, this is almost exactly what this is going down most of the time.
At the 5th problem:
Actually, for the data protection, I usually do simple solution - partion the HDD for one small partion for OS (for W2k it is enought to reserve 2G only, XP 3 or 4G) and rest for everything else. That, combined with TweakUI redirecting the user Documents folder into D:/Documents instead of the OS drive do the trick. Even 99% older games not need to be reinstalled after clean Win install, and all the Documents are saved that way.
It also enable the possibility to use R-DriveImage to backup the OS in working condition, so under 5min it can be restored from the file on D drive using boot CD That way make life easier and "problems" could be gone in minutes. Time is money