Q. #1 - The sensors are mounted on the breakaways, just to the outside of the break point. Will the sensor go through extra abuse by being on the breakaway? I could move it about four feet further in, realizing the height at the tip will then not be as accurate

If you move them farther in you will not have the same degree of protection as far as the tips hitting the ground.  I have a 5 sensor system and have not had any problems with the outer sensors on the breakaway.

Q. #2 - Does anyone use the middle sensor? I understand it will not control the height and I do not have the roll feature. Sure it gives you feedback of the booms actual height, but don't the JD 4720's have a "boom return to height feature?" So if I don't need the middle sensor can I remove it for an extra sensor in case another one gets wrecked?

The middle sensor does control the boom height.

Q. #3 - In the manual Section 6.1.6 states "If the mouth of the sensor becomes wet, it is normal for the sensor to return error messages until the transducer has dried off." It was my previous understanding that if the sensor (behind the foam) gets wet then it is permanently wrecked. And how much are new sensors?

I believe they are referring to surface moisture - on the sensor and/or the foam.  If the sensor gets moisture internally then it probably is toast.  I don't recall the cost of the sensors, but I don't think they are terribly cost prohibitive.