That's true. You can't just N Award someone straight away. There must be warning letters sent to the Parents/Guardians of the student.
Nope, system should reset.
EDIT: Most of the time, the teacher doesn't want the student to drop the subject. The N-warning letters are mostly just to scare...
All/Most 2008 HSC papers come with answer now. It is located under the "Notes" Section. Here is the Physics one: http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2008exams/pdf_doc/physics-notes-08.pdf (Answers are under the Marking Guidelines)
All/Most 2008 HSC papers come with answer now. It is located under the "Notes" Section. Here is the Chemistry one: http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2008exams/pdf_doc/chemistry-notes-08.pdf (Answers are under the Marking Guidelines)