I used Star UML and passed, so I can vouch for it.
Doesn't Sun own their own office software that competes with MS Word? I wouldn't step on the toes of the people marking my exam.
I personally linked all of my images with a simple set of HTML files. Low res-images linked with HTML, all in the same folder to eliminate any linking issues, and I sent mine away.
>>How much detail we should cover in class and sequence diagram?
Enough to get the point across, but not so much that it looks like you don't know what you're doing. You ever try to explain something you don't know too well, and end up just saying way too much? Diagrams with too much detail can send the message to the examiners that you're not really sure in your design. Of course, not enough detail and you'll fail for sure. Nothing like walking on the razors edge!
I found part two of the SCEA exam a real challenge. It took me much longer that I thought it would - a humbling experience indeed.