Hi there! Ok, here are some clarifications:
1. No, JoomlaStart can be placed anywhere on the server, the Install Directory doesn't need to be in the same location, however it need to be accessible from the JoomlaStart location
2. a) you need to have this directory accessible on the local server so you need to point the full path to it
2. b) can only be a local directory on the same server(it is used to extract the files)
3. No, it needs to be the url of the new location, like
http://domain.com/Joomla
4. Yes, you can do this, however i think you also have a drop down box below saying "Joomla existing local Joomla packages - checking existing directory", you can choose the local package from there, it needs to be in the same location as the Joomla.Start.php file
5. these ftp details can be local or remote, you can transfer the files to another server also!
So, as a clarification, you need to point the install directory on the local server so JoomlaStart can extract the files in it, and then if you want through the ftp mode you can move the extracted files on another host(or other server), and also adjust the Install Url so it points to the correct location for the new Joomla installation!
Let me know if you have further questions!
Regards! Ovidiu