Goel,
After doing this with a multilingual portal that uses Apollo PageLocalization and a few custom modules, I think I know what I am talking about.
1. Yes - sometimes with a bit of headache. There is a recommended upgrade path, as far as I read it you should first upgrade to 04.09.05 >> 05.04.04 >> 05.05.01 >> 05.06.08 >> 06.00.02 >> 06.02.02
2. The main risk is incompatible third party modules. So you make a copy of your system to a testing environment, then always backup, start the update, test (at least the pages with non-Core-extensions). If you have problems, search for a version of the extension (module, provider, skin...) that runs with the currently installed DNN Version. If you find one, unzip the DNN upgrade pack and copy the installation package of this extension to the folder /install/(whatever: module, provider, skin...). Zip the upgrade package (including the new extensions), restore the old DNN version and try to upgrade again. Repeat these steps as often as you need it, and of course with ervery "new" version of DNN. Do not forget to write down everything that leads to a successful upgrade. When you have found your upgrade path and your upgrade packages, then you can do the upgrade on your production environment.
3. That depends. If you can find an upgrade path, then there's no reason to start the whole site from scratch. Are you talking about custom extensions development? If yes, you should test your extensions after each upgrade step. Even if they run, look at the compiler warnings regarding deprecated functions.
4. AFAIK - no.
5. See 2. You should ask the manufacturers of these modules about compatibility issues.
Best wishes
Michael