1 - You probably need to remove the window frames.
2 - Because your "hole" hasn't been created. Most of the scripts I've seen make the two windows first, then go back to and retarget %1% to generate the hole. There may be some requirement for the ordering of things to occur, like having something to fill the hole? - Not that I can find any confirmation on that, just purely observation of various scripts.
3 - Make sure the game is in Windowed mode.
4 - Yes it does, because you are changing the size of the Window that the game is in, so it resizes..
5 - No idea, possibly something else going on, although the Windowed mode thing seems to come up again.

There is a quick demo script on the hotkeynet site, which has a good example. http://hotkeynet.com/wow/wow-pip.html