If memory serves it uses a position map and the UV direction maps to transform the sample points on the source map. not too complicated in principle but I'd expect it to struggle a bit with small UV shells
No, but It will be pretty straightforward to write a script to place instances at the transforms of the objects you have created. You'll find something pretty easily if you Google for it.
Try turned on "Per Pixel Camera Vector" in your material properties. It's an unfortunately obscure thing in UDK, but that will allow transforms to work with vertex color.
Also, if you can't get the bones to export as non geometry, just remove their mesh components in the Prefab in Unity. The animations only need the transform.