I have experience running a few private networks. And, I have utilized dropped domains a few times.
With dropped domains, it's hit-and-miss as far as preserving PR. So don't count on any of a site's authority staying. However, to increase your chances of keeping the PR, try to re-create any archived pages that you can find. If you cannot find the actual content - but you know the URL - make a page for that URL and make up new content.
It sounds like you want to just jump into it right away and use these domains in your network. That's fine, but personally I just buy 'em, rebuild 'em, and let them sit. When I find out that a domain has kept some authority and PR I turn it into something (i.e. use it in a network or sell links on it or whatever).
You can use shared hosting accounts for your network. You get IP and geographic diversity. And it's not too expensive. (It's surprising how many accounts you can find that cost less than ten USD a year, for instance.) Your hosting does not need to be some sort of "SEO hosting" for a private network. You also do not need a VPS or dedi with a block of IPs. You can do that if you want - I just don't.
You will need a tool to manage all of this. When you get a few hundred sites (subdomains plus root domains) you will not be able to make heads or tails of what's what. There are still times when I see a subdomain (when looking through the list) and think, "heh, I forgot about that one".
I programmed my own management suite. It took hours and hours and went through two iterations and many tweaks. It still isn't perfect. A good, ready-made solution that did everything my own tools do (and more!) is WP Mothership by the guys at SoftWarp. I tried it out when he first released it, and I thought it was a solid app. Kinda confusing at first, but if you take your time and just use each piece and read the documentation, you'll probably "get it".
As far as using feeds to populate your network: beware. If it seems too easy, it probably is going to end up with no results or negative results. People will probably flame me, or tell me I don't know what I'm talking about - and that's fine - but the engineers at Google aren't stupid, and the policies Google has implemented are very smart. Yes, I know we can find search results all day long that we can laugh at because they look dumb. But what happens when Google "gets it right" and discovers your site is spammy as hell via one of their handjobs (i.e. a manual review)? It happens.
When it happens to one site, on some .info you reg'd for a buck, you can get that dirt off your shoulder and move on. (After all, a true blackhat will churn and burn, right?) Well, if you want a solid linking machine that you can use at will to push solid link juice at any site you wish...you need to build it right to begin with. If you want it to last, and actually see good results, that is. There's no easy answer I can give you for that one. You can pay for writers, you can write content yourself, or you can get really damn creative in other ways. But I don't know of an off-the-shelf feed parser or tool that can populate a site with scraped (or spun) content and turn it into a trusted property.
To answer your question about using subdomains, by the way: I use them when the domain allows for it. In other words, when I have a very narrowly-defined domain name - "summertimegirlstubetops" for a random made-up example that's on my mind - I just leave it flat as a top-level standalone domain. I end up with enough domains usually to where I have some that are really specific and a bunch that are "general-purpose". So another one might be "designerjeans" (or something equally as "vanilla"). For domains like that, I build a ton of subdomains - I could use brand names, styles, etc. for those. Just do what makes sense and what feels natural. If it is organized in that manner, you might actually end up with a helpful site...hmmm think about that.
Speaking of how to pick your categories, Imma give you a bonus tip, for free. Here it is: let Google pick your categories (i.e. subdomains) for you. How to do that? Well in the past there have been a number of methods. I've used their search suggestions, their LSI keywords, I've used the Wonder Wheel...but my favorite method (which is recent) is to use AdWords' Keyword Tool. Put in your main keyword, and click "Search", and (if it's available to you) click the green tab that says "Ad group ideas (beta)". If you ever want to see a logically organized, concise, relevant group of WordPress categories, subdomains, etc. that will be it. No WSOs or paid tools needed.
If you have any more questions, let me know and I'll try to help.
Anyone else have any comments on my other questions?
