1. No, we will not. The domain that you will register is yours and you can transfer it whenever you wish. Please note that only an active domain name could be transferred. In case you let the domain name to expire you will have to renew it first.
2. Yes, that is correct. Our Chocolate/Free hosting plan does not allow you to send or forward emails (SMTP is disabled). Any scripts that send emails will not work as either. Our paid hosting plans do not have this restriction. You can upgrade your web hosting plan from the "Change plan" section on your control panel, you will find the link on the left "Upgrades" menu.
Another major requirement in order to be able to use the email features that we offer is you to host or to register a domain name in your account with us. You will not be able to create an email account using a free subdomain.
Upgrading to a paid hosting plan would also remove the 500KB file size limit, which the Free plan has, so you will be able to upload larger files. The Watercircle plan is only $2.95/month and has no such restrictions. In addition disk space, monthly traffic and other features will be increased significantly. You will be able to check a comparison of our payed hosting plans features here:
http://freehostia.com/compare-hosting-plans.html
3. There is no problem to easily upgrade your hosting plan to a payed one as I have mentioned already. You will just have to follow the Change Plan menu.
If you have any further questions or problems, please do not hesitate to contact us!