Some really good points and well delivered!
A couple of things though, just to add to the debate.
£35k as a price point. Considering the specs of some peoples S3's on this site, I don't think £35k will put that many people off.
An S3 with buckets, DVD nav, BOSE, Cruise, Light pack and a few other bits and bobs is £33k, so clearly people are prepared to spend in that threshold.
With regards running gear - most of the running gear would be lifted straight from the TT-RS, engine, brakes, gearbox, drive shafts etc - so development would be easier, or lets say the R&D budget would effectively be shared across the models making it more cost effective.
The only real dev would be getting the suspension/damping sorted.
I think you have hit the nail on the head with regards the tooling for wider arches. Note the TT-RS doesn't have any body work mod's like that and is no doubt the eact reason the TT-RS will be going on the standard TT production line, not a unique Quattro GMBH production line.
You clearly bought an S3 for the same reasons I did - fast, capable, but not chavvy. I think the S3 deserves better recognition for what it can do. It will hassle cars in the sector above when pushing on, but you can also safely pull in to a clients car park without them pre-judging you.
The RS3 could continue this trend, but as you say - it has to deliver!!!
Capacity - as mentioned above, given that the TT-RS is runnig down the same production line as a TT-S or TT-TDi I'm sure they can dot he same with the RS3 and run it down the A3 production line so shouldn't cause any issues.
Again, I agree 100% about the engine - why develop a new unit that delivers 340bhp and and 30mpg and stick it in one niche model? Doesn't make sense.
I heard from someone several times that the RS3 was developed and ready before the TT-RS, but Audi management wanted the engine to launch in the TT for marketing reasons. If this is true, the RS3 could be launched sooner than we all think. I guess we'll see soon enough.
I'll take mine in Sepang Blue please