Way 1) is a crap way to do it IMHO, cause if the game needs to write any config-files or things like that, it won't be able to when running it from CD.
Also, many games make entries in the registry that won't be applied either when simplying copying the installed game... unless you install the game, export the registry settings to a file, copy that file to the CD, and remember to apply it before running the game.... simply too much of a hassle.
Way 2) is the one I personally use, and it works great when you remember to apply the appropriate cracks and stuff before burning. I like to include the latest patches too, so the game is up-to-date
Can't help with your last 4 questions, since I have no experience with Alcohol and so forth... but hope the above helped anyways
