>> 1) Should I recess drivers into the front baffle in order to
>> control diffraction? Or does the removal of material weaken the
>> baffle too much? Or should the baffle be made out of 1" stock?Baffle recess is attractive, so it can be done for that reason alone. As to diffraction, the edge is insignificant at midrange frequencies, in my opinion. It is too small to have any effect.
>> 2) Does closed cell foam work very well as a speaker gasket?
No, it is too brittle.