Purgatory: Does it exist?
I'm just going to say a few words on point (2), because I'm pretty sure that's the heart of the matter.
In the Galatians 5:4, cited by Dave, I think Dave paid too much attention to the "redeemed" and "adopted as sons." Christ doesn't have any particular desire for whatever one would pick up in a marketplace. Christ came to make us sons of God. Look at Michael's baseball through window analogy. The son needs to be restored to being as a son, as a part of the family.
The question about purgatory, and really why this thread will rapidly become circular, is what did Christ do? Historically, there've been three or four ways of looking at this* (depending on how you count) - Christ as ransom, Christ as satisfaction, Christ as making us sons of God, and Christ as mere exemplar. The first two is where the tension's at, and has always been (Christ as mere exemplar is an 18th/19th c. liberal protestant thing). From early on, Christ has been understand as ransom to free us from death. One of Fathers put it in fishing terms, with death as a fish and Christ as the bait, whereby God caught death and gutted it of its power. Satisfaction theory looks at Christ's death as paying God back what humanity owed. Deification theory looks at Christ as coming to restore us to sonship with relation to God**. Catholicism has tried with varying levels of success to hold all three of these theories together, but in tension. I would argue that the last one, sonship is key to making sense of the idea of purgatory. An emphasis on ransom or satisfaction, as done by Protestants, muddies the issue up. That is, if Christ simply paid back what we owe to God or freed us from death, then what else could we do? But, if Christ does more than that - makes us sons and daughters of God - then there is more for us to do. I have not yet met anyone who converted and all of a sudden became perfect (I have met recently "saved" people who've thought they were though...). This is the whole point of Catholic sacramental life, of works of mercy, of pretty much anything the Church promotes being done. But, a lot of people die before quite getting there. They're there in the already-but-not-yet sort of way that a mustard seed is already like a mustard tree, but they've still got growing to do. This keeps on after death. That's purgatory.
I hope I haven't violated any of the hot-thread rules. I just wanted to point that out about redemption. If people with different soteriologies talk about purgatory, they'll never agree. Ever. No matter what. They could both be there, and still wouldn't disagree. Purgatory is actually a really superficial issue to the real question of soteriology, and I'm confident to a high degree that the rest of the thread will confirm that. If you're thinking in terms of just satisfaction or ransom without taking deification into account, it won't ever even begin to make sense. I have enough Protestant friends to know this.
* Gustav Aulen, a Swedish historical theologian, wrote Christus Victor on this subject. He lumped ransom and deification together as the "classical" view, and identified satisfaction as the "medieval" view, with Luther resurrection the classical view. Of course, Aulen ignored that Luther ignored the idea of deification, and that the medieval view presumes deification but doesn't talk about it much.
** Best laid out in St. Athanasius' De Incarnatione Dei Verbum (On the Incarnation of the Word of God). Roughly, we were created in the Image of God through the Word of God. The fall tarnished that image severely. Christ's work is to bring us to fully reflect the Image of God.