I've made morphs for market apps on several occasions...the most recent was changing the background on my meridian music widget.
To answer your questions, it works without causing any problems to the functionality of the app itself, nor have I had any issues from applying the morph with the apk still located in data/app. But, you will get errors when trying to apply an update through the market. This also screws things up when you have lots of updates and try to "update all." The updates will work fine until the market tries to update the one you modified, then all apps it tries to update after that will also come back with errors.
Since I don't check for updates often, I need that "update all" button to work properly - so I solved the problem by using Titanium Backup to detach the modified apps from the market. The downside is you won't see if an update is available, but an update would require you to uninstall, reinstall, then reapply the morph. Most updates aren't critical enough to go through that hassle...imo.
Hope that helps!